Deductions
Deductions, what are they? Well our friend wikipedia defines them as “an expense incurred by a taxpayer
that is subtracted from gross income and results in a lower overall taxable income.” One common misconception
about deductions is that they offer a dollar for dollar tax reduction, such as do Tax credits. This however is not the case with
deductions, as they will only reduce your tax bill by the percentage of whatever your tax bracket may be. For instance if you
are in the 35% tax bracket and had a $1,000 deduction your overall tax liability would be reduced by $350.
When it comes time to file your taxes one of the major decisions you must make is whether or not to take the standard deduction or itemize your deductions. The standard deduction allows the taxpayer to subtract a set amount based on filing status from their Adjusted gross income to arrive at their taxable income.
Basic Standard Deductions, Tax Year 2006
Filing status Amount
Single $5,150
Married Filing Jointly $10,300
Married Filing Separately $5,150
Head of household $7,550
Qualifying widow(er) $10,300
The other choice is to itemize your deductions. This is the wisest course of action if you believe
your deductions over the course of the year will exceed the standard deduction rate. However you must have
documentation of your expenses when itemizing, which is where the taxjournal.org website can help.