How to determine the best way to reduce your tax bill
Many taxpayers choose the easiest way to do their taxes by filing a Form 1040EZ. The problem is that this form only allows you to tax the standard tax deduction, thereby limiting your ability to reduce your taxable income. Lower taxable income means a lower tax bill. By spending some extra time on your tax return by itemizing your deductions you may lower your taxable income, effectively getting paid for that additional time.
Standard Deduction
The standard deduction is a fixed amount that's automatically deductible from your adjusted gross income (AGI). The size of the deduction depends upon your filing status. The largest deductions go to those that file as 'Married Filing Jointly.' The deduction amount typically changes each year and is increased based on cost of living fluctuations.
The standard deductions for the 2009 tax year are:
- Single: $5,700
- Married Filing Separately: $5,700
- Head of Household: $8,350
- Married Filing Joint: $11,400
- Qualifying Widow/Widower: $11,400
Keep in mind certain taxpayers aren’t eligible to take the standard deduction and must itemize. These taxpayers include nonresident aliens, estates and partnerships. For other taxpayers itemizing isn’t a requirement but may benefit them financially.
Itemized Deduction Categories
The IRS allows you to deduct specific expenses that fall into one of eleven basic deduction categories.
- Medical and Dental Expenses
- Deductible Taxes
- Home Mortgage Points
- Mortgage Interest Expenses
- Contributions
- Casualty, Disaster and Theft Losses
- Business Use of Home or Car
- Business Travel and Entertainment Expenses
- Educational Expenses
10. Unreimbursed Employee Expenses
11. Miscellaneous Expenses