Standard deduction. Boring, but it lowers your tax.
Jun 05 '01
The Bottom Line If you don't "itemize deductions," you get to take the IRS supplied standard deduction when you compute your income tax.
How You Compute Federal Income Tax
To compute your income tax, you first add up all your income, to get a figure aptly called total income.
Then, you get to subtract three types of items. First, subtract adjustments such as IRA contributions and alimony, to get a figure called adjusted gross income or AGI. Then subtract deductions and exemption credits to get your taxable income, which is the figure your tax is based on.
Finally, your tax may be adjusted by various additions and credits.
Deductions
Deductions reduce your tax because they reduce your taxable income. Typical deductions include medical expenses, taxes, interest expenses, charitable contributions, casualty and theft losses, and miscellaneous deductions such as unreimbursed work related expenses. Note that there are severe restrictions on all these deductions. For example, only the medical expenses exceeding 7.5% of your AGI are deductible, and credit card interest is not deductible.
If you explicitly list all your deductions and report them on Form 1040 Schedule A, you are said to be "itemizing deductions."
The Standard Deduction
If you do not itemize deductions, either because you are too lazy, haven't kept records, or just don't have many, the IRS allows you to deduct a fixed amount called the standard deduction.
The amount of your standard deduction depends on your filing status, and it changes from year to year. In 2000, the standard deduction was $4,400 for single filers, $6,450 for head of household, $7,350 for married filing jointly, and $3,675 for married filing separately.
If you start out itemizing deductions and find out that they add up to less than the standard deduction, you just take the standard deduction.
People just starting their economic lives usually end up taking the standard deduction. Most people graduate to itemizing deductions when they buy a house because the two major ownership expenses, mortgage interest and property tax, are deductible.
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