by Martha Leonard

Created on: March 26, 2008

UNDERSTANDING TAX DEDUCTIONS

Is anything more confusing that taxes? The average U.S. Citizen pulls his/her hair out when each new year rolls around and thoughts turn to filing taxes. So many laws, so many changes, so much paperwork. No wonder tax preparation is a multimillion dollar industry in this country! As a volunteer to help people file taxes, I am aware of some of the most confusing issues about filing.

The most important thing to learn about taxes is the vocabulary. The old days of complicated calculations, thank goodness, are over. With a glut of tax-preparation programs on the market today, no one has to worry overmuch about their mathematical prowess. The key to understanding what and how to file, however, is the terms. In this article we will explore deductions.

In any tax return there are three kinds of deductions: standard, itemized and business. The standard deduction is that which Congress sets for each return, regardless of income. The itemized deduction is the one an individual takes based on his/her expenses throughout the year. Business deductions sometimes come under itemized deductions. If a person owns his or her own business, deductions related to that business are listed separately.

Standard deductions are called that because they are standardized. That is, they are the same for everyone in certain conditions. These deductions are based on a person's filing status. The standard deduction for someone filing in 2008 as a single person, for instance, is $5,350. That is also the amount for Married Filing Separate. Married persons filing a joint return get $10,700 as a deduction. A Head of Household (usually an unmarried person who has dependents) gets $7850. The amount of a standard deduction varies each year and is usually based loosely on the average cost of living increase for the past year. Standard deductions are designed to cover average, everyday expenses people normally have during a year. Some of these expenses are medical, charitable giving, interest on mortgage loans, sales taxes, etc. Standard deductions are figured in automatically on a tax return unless the tax payer decides to itemize instead.

A taxpayer cannot take both the standard and the itemized deductions. Most of the time, the standard deduction is generous enough to eliminate itemizing. If a person believes s/he has more expenses than the standard expenses, any reputable tax preparer will figure the taxes both ways, i.e., using the standard deduction, then the itemized

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