When the fiscal year comes to an end, people start filing their income tax returns. One issue that tends to put people into a serious dilemma is itemized deductions and standard deductions. Here, we try to understand both the concepts and compare the two.
The income tax department of the United States of America is known as the Internal Revenue Service. The IRS is responsible for collecting Federal income tax throughout the United States. There are many different exemptions and tax relief provisos that are provided by the IRS.
A tax deduction is basically a reduction in the taxable income of a person. The IRS collects income tax that is based upon the people’s income. In order to reduce the tax burden, the IRS has made two provisions for tax payers, which are itemized deductions and standard deductions. These deductions basically reduce the amount of taxable income. Here is an insight into both these provisions. One very important point that every person should note is that the only one provision of these two can be availed by the income tax payer.
Itemized Deductions Vs. Standard Deductions
According to the taxation laws in the United States, a standard deduction is a dollar amount that can be reduced from the taxable income of the tax payer who does not choose to itemize his deductions. The standard deduction is a flat amount and the same dollar amount is applicable to all tax payers who wish to choose the deduction.
As of the year 2009, the IRS permitted a standardized deduction of $5,700 for individual tax payers, and $11,400 for married couples filing jointly. The bracket of deductions is even higher in cases where tax payer is widowed and is of the age 65 or higher or is disabled. These tax brackets are mentioned in the Form 1040 and also on the official interface of the IRS.
Itemized deductions, on the other hand, have a different meaning and definition. This deduction is based upon eligible expenses that individual taxpayers can report on their federal income tax returns, thereby deducting the total amount from taxable income. These deductions, however, require some sound backing by legitimate proof. Some of the prominent items that are valid include medical expenditures, insurance premiums, mortgage interest, and business related expenditures.
In short, any necessary expenditure that is paid to financial institutes and insurance companies can be a valid ground for itemized deduction. However, it must be noted that all consumer based expenditures are not itemized expenditures. This will also include, rent for residence, late payment fees of credit card bills, etc. Another convenient itemized tax deduction is depreciation, which is an expenditure that occurs as a result of wear and tear of assets.
The genuine difference between itemized deductions and standard deductions is that itemized deductions have to be claimed by the tax payer, while standard deduction is a flat fixed amount and is applicable to all tax payers unless they choose itemized deductions. The best solution that a tax payer can use is to avail the deduction that amounts to more. The only care that is to be taken is of providing a thoroughly legitimate proof of itemized deductions.