The first year I filed taxes, I was so excited I could finally claim church donations on my taxes. Except, it wasn’t really worth it to claim the donation because my itemized deductions were less than my standard deduction. Yep, even though you qualify for a certain tax break, it’s not always beneficial to take it.
Deductions allow you to lower your taxable income and indirectly lower your income tax liability by a percentage. Many taxpayers aim to take as many deductions as possible so they pay less money to the government.
The standard deduction is a fixed amount that everyone can deduction from their income with a few exceptions. The amount of the standard deduction is based on tax filing status. For example, in 2010, the standard deduction for a single tax filer is $5,700. For married tax filers, the standard deduction is $11,400. The standard deduction reduces your taxable income and therefore decreases the amount of tax you owe by a percentage.
You might take the standard deduction if you don’t want to itemize, can’t itemize, or if your itemized deductions are lower than the standard deduction. Some people can’t take the standard deduction. For example, if you and your spouse file separately and your spouse itemizes, you must also itemize. Nonresidents and resident aliens also have separate rules for taking the standard deduction.
The IRS has a long list of tax breaks you might qualify for. For example, you may be able to deduct certain medical or dental expenses if they were more than 7.5% of your adjusted gross income. If you paid a large medical bill last year, you may be able to get a tax benefit from it. Homeowners may be able to deduct a certain amount of the interest they pay on a mortgage. Donations made to a charity are also deductible.
You may not be able to claim certain tax deductions if your income exceeds a certain amount. Or the total of the deductions may have to exceed a certain minimum before you can take the deduction. If the total of your itemized deductions is less than the standard deduction, it’s better to take the standard deduction, if you qualify.
Above-the-line tax deductions
Above-the-line tax deductions are really an adjustment to your income. They are subtracted from your income before any other deductions are made. The best thing about above-the-line tax deductions is that you can take them regardless of whether you itemize or take the standard deduction. If these above-the-line tax deductions were part of the list of itemized deductions, some taxpayers may never get the benefit of them.
There are some ceilings on above-the-line tax deductions. For example, you can deduct the amount of interest paid on a qualified student loan, but only a maximum of $2,500.
Business/Schedule C deductions
Schedule C deductions really fall under above-the-line tax deductions, but it’s such a big part of a freelance writer’s taxes, that it deserves it’s own category. If you spend money on your business, Schedule C is where you’ll adjust your income based on your business expenses. If you buy it for your business, there’s probably a way to deduct it on your taxes.
I typically deduct home office expenses, office supplies, Paypal fees, miles driven for research, internet cost, software expenses (e.g. Microsoft Word), cost of books (like the AP Stylebook), health insurance premiums, web hosting fees, and domain fees.
Not only will this help you file your taxes for 2010, but it can help you plan your spending for 2011.