Maximizing Your Tax Deductions
There are three main types of deductions: standard, itemized and "above the line." Almost everyone who pays taxes enjoys an automatic standard deduction. For tax year 2014 the standard deduction for a single person is $6,200; married filing jointly is $12,400; head of household is $9,100; married filing separately is $6,200 and the deduction for a surviving spouse is $12,400 [source: Erb]. Deduct whatever amount applies to you from your gross income and that's your taxable income if you have no other credits or deductions to take. You often have to add up all your itemized deductions to see whether you'll save more on taxes by listing them or by just going with the standard deduction. The IRS does not allow you to do both.
Above-the-line deductions are deductions taken from your gross income to arrive at your AGI. Experts believe this to be the most helpful deduction for taxpayers, especially since those claiming above-the-line deductions can also employ itemized deductions. Many of these were detailed on the previous page, including job-related moving expenses, alimony payments and student loan interest [source: Rosen].
Itemized deductions are where a lot of tax finesse comes into play. These are deducted after your AGI is calculated. In general, taxpayers that itemize the most tend to be homeowners because they have the most skin in the game, so to speak, thanks to mortgages and other homeowner expenses. Certain levels of medical, dental, education and business expenses are candidates for itemization, too [source: IRS]. If the amount of itemized deductions you can claim exceeds your standard deduction, it's worth the trouble to itemize them. If you're close to exceeding your standard deduction but not quite there, you can clinch it with a little bit of advance planning. Make more charitable donations, for instance, or pre-pay real estate taxes for the next year.
Good record-keeping is probably the easiest way to ensure that you don't miss out on your due. "People tend to under-deduct more than they over-deduct," says Kelly Phillips Erb, a tax attorney who practices in Philadelphia. "They write out a check to the Girl Scouts and forget about it." She encourages the use of tax software or an organized list to track medical expenses, charitable donations, unreimbursed work expenses and other potential deductions that snowball throughout the course of the year. A few bucks here and there might not seem like such a big deal, but can really add up over the course of 365 days!