When a business brings in revenue, not every penny is taxed. Businesses are allowed to deduct their expenses from their income. It seems only fair considering there are costs to doing business and it would be unreasonable not to consider those when taxing their income. The same is true for individual taxpayers. We are permitted to deduct certain expenses from our income to reduce our tax liability. These are expenses that the tax code has permitted us to deduct from our taxable income and help us lower our tax liability.
The standard deduction is a dollar amount that a taxpayer can claim to reduce their taxable income. The amount you can claim depends on a variety of factors including your filing status, disability, and age. For example, nonresident or dual-status aliens are not eligible for a standard deduction. It’s separate from a personal exemption, which is a set amount available to taxpayers and dependents.
A taxpayer can claim either a standard deduction or a series of itemized deductions, whichever is greater. The standard deduction for the 2016 tax year is $6,300 for single filers and $12,600 for married filing jointly tax filers. Head of households can claim a $9,300 standard deduction while those married filing separately can only claim $6,300. A qualifying surviving spouse may claim $12,600. If you are married filing separately, both taxpayers must claim the standard or both claim the itemized deduction, they must match.
The standard deduction is higher if you are 65 years of age or older, blind, or your spouse is 65 years or older and blind. Blind is defined as having not corrected vision of at least 20/200 or field of vision of no more than 20 degrees. For either 65 or older or blind, you get an additional standard deduction. For single filers, it’s $1,550 for 65 and older or blind. For married filers, it’s $1,250 for each.
Common itemized tax deductions include mortgage interest, charitable contributions, and state and local taxes paid. If your itemized deductions are greater than the standard deduction, you’ll want to itemize your tax deductions. You cannot claim both. For example, if you are only eligible to take the standard deduction and you made charitable contributions this past year, you would not be able to claim those contributions as a deduction. However if your total deductions are right at the threshold amount for standard deductions ($6,300 single and $12,600 married filing jointly), it is worth making sure you gather additional receipts for expenses like charitable contributions, un-reimbursed employee expenses, or job search to bump you up over the standard deduction, which will give you the opportunity to take additional deductions.
If you are a dependent and someone else is claiming you as an exemption, such as a parent, then your standard deduction is limited to $1,050 or your earned income for the year plus $350, not to exceed the standard deduction amount. Earned income refers to salaries, wages, tips, and any fees you receive for work you do. This is different than unearned income, which would be returns from investments or interest.
Don’t worry about knowing these tax laws. TurboTax will compare your tax deductible expenses entered to the standard deduction and choose either itemized deductions or the standard deduction. Whichever method gives you the biggest tax refund you are eligible for.