Itemized Deduction

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Offline Md. Al-Amin

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Itemized Deduction
« on: February 22, 2014, 03:16:40 PM »
Itemized Deduction
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What it is:

An itemized deduction is a reduction in taxable income that is dependent on calculations specific to the taxpayer's expenses or situation. Federal, state and local tax codes determine what is deductible and which taxpayers are eligible for itemized deductions.

How it works/Example:

There are two kinds of tax deductions: standard and itemized. A standard deduction is a flat amount that applies to all qualified taxpayers. An itemized deduction requires calculations, proof of a qualifying expense, and time to fill out extra IRS forms at tax time. A taxpayer cannot claim standard deductions and itemized deductions; he must choose one.

Generally, if a taxpayer qualifies for a deduction, the taxpayer can subtract the amount of the deduction from his gross income. This in turn lowers the amount of income subject to tax. For example, if your gross income is $100,000 this year but you qualify for a $10,000 standard deduction, then you will be taxed on $100,000 - $10,000 = $90,000. If your effective tax rate is, say, 20%, then instead of paying 20% of $100,000 (i.e., $20,000) you can take the deduction and only have to pay 20% of $90,000 ($18,000). The $10,000 tax deduction saves you $2,000.

Itemized deductions often “phase out” for people with higher incomes. After all, creating, modifying, or eliminating tax deductions are one way for governments to encourage or discourage certain types of economic growth, social behavior, or activities.

Why it Matters:

There are several kinds of tax deductions in the United States. Standard deductions are deductions taxpayers usually take advantage of if they don’t qualify for other deductions. Though taking a standard deduction is much easier and less time-consuming, when a person itemizes her deductions, she does so because she qualifies for several deductions that exceed the standard deduction. Deciding whether to itemize one’s deductions is a matter of knowing the tax rules and consulting a qualified accountant.

http://www.investinganswers.com/financial-dictionary/tax-center/itemized-deduction-5526

Offline munna99185

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Re: Itemized Deduction
« Reply #1 on: February 26, 2014, 01:01:24 PM »
An itemized deduction is a deduction from a taxpayer's taxable adjusted gross income that is made up of deductions for money spent on certain goods and services throughout the year. The specific deductions that are allowed are outlined by the Internal Revenue Service and include such expenses as mortgage interest, state and local taxes, gifts, and medical expenses. Usually, an itemized deduction is limited to a certain percentage of adjusted gross income. As an alternative to standard deduction, an itemized deduction requires taxpayers to keep track of each possible tax-reducing expense throughout the year. Individuals who frequently spend large amounts on medical care, state and local taxes, donations or other deductible expenses may be better off itemizing. However, tax law may set thresholds in spending that must be exceeded before the deductions can be made. For example, in the medical category, perhaps only expenses that exceed 7.5% of your adjusted gross income may be deducted. If you didn't spend at least that much, then none of your medical expenses will be deductible. [Source: http://www.investopedia.com]


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