It’s still tax time! If you finished your taxes already, kudos to you!
For everyone else, lets get some more questions answered..(and for the record, I haven’t finished mine either, so don’t worry). 🙂
Also, if you didn’t get to read Part 1 of Tax Questions Answered, click here.
I do my parents’ taxes every year and just finished their 2014 filing this weekend. However, I recently realized that even though they always take the standard deduction, I still spend time calculating their itemized charitable contributions- even though that particular type of contribution (charitable) doesn’t factor in on your taxes if you take the standard deduction.
If the paragraph above made no sense to you, let me clarify below. We’ll start with some terminology I feel like I should know all of this now that I’m thirty, but some of it I actually had to dig into a bit, so I’ll explain it pretty piecemeal here:
Gross Income= What you make in a year, including EVERYTHING, from Jan 1 to Dec 31 (you, of course, probably already know this one).
Adjusted Gross Income= Your taxable income after you subtract certain ADJUSTMENTS but before you subtract either the Standard Deduction or your Itemized Deductions (you can only subtract one or the other of those two types of deductions)).
Standard Deduction= An amount you can always subtract from the gross income you’ll be taxed on, as long as you don’t subtract your itemized deductions instead. The standard deduction for the 2014 tax year is:
- Single or married filing separately: $6,300
- Married filing jointly: $12,600
- Head of household: $9,250
Itemized Deduction (not the standard deduction kind)= These are deductions you can take if you decide NOT to take the standard deduction. These include but aren’t limited to: medical and dental expenses that exceed 7.5% of your AGI (Adjusted Gross Income), property taxes, your state and local income or sales taxes, charitable donations you make, work related travel, union dues.
So if you’re trying to decide whether to take the standard deduction or itemize your deductions, you want to basically choose whichever one is larger.
Here’s an example: Let’s say you’re unmarried with no children and make $50,000…And you can itemize these deductions:
- $1000 in work related unreimbursed travel
- $500 in medical expenses
- $400 in state and local taxes
- $100 in clothes donated to goodwill
This equals $2000 in Itemized donations. If you chose to itemize deductions, you’ll be taxed on $48,000 (50,000-$2000). If you took the standard deduction, you’ll be taxed on $43,700 ($50,000-$6,300). So you’d want to take the standard deduction for sure, because you want to be taxed on less income and pay less money 🙂
I’ll stop here for now, but hope this was somewhat helpful! Next time, I’ll talk about Adjustments and Credits, and how they can reduce your tax bill even further!
As always, please let me know if you have any questions or anything to add. Thanks!