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An Overview of Estimated Deductions: Here’s All You Need to Know

 


When filing your income taxes yearly, you should choose between standard or itemized deductions. Both help you lower your taxable amount, although the methods are totally different, and the amount you can save from these deductions also varies. A standard deduction is the easiest way to calculate the total deduction amount, while itemizing your deduction is a complex process but it can be really helpful for those who have to list multiple expenses that fall into the itemized deduction category. 

Let’s understand each method, and later we will show you how the estimated deductions work and how much you can save on your taxes using both methods.

Standard Deduction Vs. Itemized Deduction

The IRS declares a specific amount you can deduct from your income tax every year, depending on the current inflation. That’s called the standard deduction. The amount varies for everyone — depending on your filing status. For example, it’s different for singles and married couples filing jointly. Here’s the standard deduction rate for people with different filing statuses in 2022:

  • Singles: $12,950

  • A married couple filing their income tax returns jointly: $25,900

  • Head of the family: $19,400

Before the Tax Cuts and Jobs Act was introduced in 2018, the standard deduction rates were half the amount they are now. The IRS raised the rate for taxpayers, making it easier for individuals and couples to pay their taxes effectively and as required. Earlier, people used itemized deductions, as they were able to claim a higher deduction using this method. But, thanks to the IRS. That’s no longer needed unless your expenses exceed the maximum amount set forth by the IRS for the standard deduction. If you have to report several expenses, try itemized deductions. 

The Purpose of Itemized Deductions

You can calculate itemized deductions on Schedule A and transfer the final deductible amount to Form 1040. The amount is deducted straight from your adjusted gross income. Once the deductions are subtracted from your AGI, whatever remains is considered your total taxable income. Itemized deductions are introduced by the government to allow taxpayers certain incentives, such as donations to charity, buying a house, home office expenses, etc. To learn which deductions can be itemized, follow Schedule A closely and check each section of the form. Here are a few itemized deductions that taxpayers are allowed:

  • Unreimbursed medical expenses that exceed 7.5% of the taxpayer’s adjusted gross income

  • Long-term care premiums

  • Home mortgage interest (as long as your mortgage doesn’t exceed $750,000)

  • Property taxes and state taxes paid

  • Casually and theft losses

  • Donations you have made to the charity

  • Other miscellaneous deductions

Before you deduct these expenses from your adjusted gross income, make sure you have a receipt of each expense or other proof of these transactions. IRS verifies itemized deductions carefully, so there’s a chance you might get audited and asked to submit the receipt for certain expenses. If your expenses exceed the threshold, you can carry them over to the next calendar year.

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