Even though preparing your tax returns is a tedious chore, thinking of ways to minimize your taxes can be a fun task – especially if your methods pay off. Mind you, think only of legal ways, and don't entertain thoughts of tax evasion or cheating on your tax deductions. Such tricks will only get you into a lot more trouble later.
A good way to minimize your taxes is a tax deduction, also called a tax-deductible expense. According to Wikipedia, tax deductions represent an expense incurred by a taxpayer that is subtracted from gross income and result in a lower overall taxable income. Basically, tax deductions equal lower taxes, period.
When you want to avail yourself of a tax deduction, you need to choose between standard and itemized deduction. Depending on your circumstances, one of these two will save you more money (it can't be both). A standard deduction is a flat amount deducted from your taxable income. The standard deductions for 2005 tax returns were:
- $5,000.00 if you file as single
- $7300.00 if head of household
- $10,000.00 if you're married and filing jointly with your spouse
Taxpayers who are over 65 years old or are legally blind can apply for an additional deduction.
If you took the time to list your allowable expenses and found out that they're worth more than the standard deduction, go for an itemized deduction. Most of the time, people who spend a lot on mortgage interest, charitable contributions, and medical care save more when going for itemized deductions.
Should you choose to itemize your deductions, keep in mind some common allowable expenses such as real estate taxes, state and local income taxes, mortgage interest, personal property taxes (e.g. cars, boats), contributions to charities, and medical expenses. Be advised that you can only use the last one if they exceed 7.5% of your adjusted gross income.
Lastly, you don't need to stick to one type of tax deduction for your entire life. This year, an itemized deduction might save you more money, but next year it might be the standard deduction that keeps more bills in your wallet. Make sure to be meticulous every year so you can reap the full benefits of these tax deductions.
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