Get Ready: Part Two

Tax Team hopes everyone is out enjoying the warmer weather.

 But, with snow again in the forecast, it might be a good time to continue getting documents together for tax time.  Hopefully, everyone is getting receipts and statements organized. Now is the time to make that tedious work pay off.

 Tax deductions and tax credits are both ways to decrease your tax liability.  But how do they work? What is the difference between the two?  A tax deduction is an amount of money that you spent that can be subtracted from your taxable income, therefore lowering the amount of taxes you pay.  Deductions include your mortgage interest, state and real estate taxes, medical expenses, charitable donations and unreimbursed work expenses. These amounts are reported on the Schedule A. The process is called “itemizing.” But… not everyone has enough of these deductions to use on a Schedule A!  Don’t they get a chance to lower their tax liability?  Do not fear! Taxpayers who do not itemize use the “standard deduction” The standard deduction is a set amount the IRS allows you to subtract from your taxable income.  For tax season 2014 the standard deduction for a single taxpayer is $6,200; for a married couple filing jointly $12,400 and for a head of household $9,100.   There are special calculations for people who are blind and/or over age 65.  So, if you do not have a lot of items to use on a Schedule A, you would use the standard deduction.  If you have more than the specified amount, you would itemize.  For example, a single taxpayer with $3100 in deductions would not need a Schedule A and would use the standard deduction.  A married couple with $15,000 would use a Schedule A, and their tax return would be more complex.

 A tax credit works differently.  It lowers your actual tax.  Examples of tax credits include the education credit, savers credit, adoption credit, and the dependent care credit.  A special form is used to calculate the credit based on your income and the amount of the particular item.  The result is then subtracted, dollar-to-dollar, from your tax liability.

 The tax code allows for more deductions, exemptions, credits and subtractions than you can imagine. One of the advantages of using good tax software or working with a tax professional is to educate you on the best ways to lower your tax liability.

  Do you have a question on what can be itemized? Next week we will discuss specific deductions.  Please contact us at www.taxteam1.com or at john.lawless.tax@gmail.com.