Tag: tax season

 

What is a Standard Deduction?

By Rebecca Lake
March 16, 2020

One of the most common mistakes you can make when filing taxes is not claiming the standard deduction. 

If you’re not sure what a standard deduction is, here’s a good explanation: The standard deduction is a set dollar amount of money you can deduct from your taxable income for the year. This takes the place of itemizing deductions individually. 

In general, tax deductions reduce your taxable income for the year, which can lower the amount of taxes you owe or increase the size of your refund. So, it’s important that you claim the standard deduction if you are not going to be itemizing. 

To help you decide if you should claim a standard deduction, read on. 

How does the standard deduction work?

The IRS defines the standard deduction as a specific dollar amount that reduces the amount of income on which you’re taxed. There’s a basic standard deduction that applies, based on your filing status, along with additional standard deduction allowances based on age and whether you’re blind. The standard deduction amounts are set by the IRS and they can be adjusted each year, based on inflation and/or changes to the federal tax code. 

Not everyone is eligible for the standard deduction. You can’t claim it if:

  • You itemize deductions on your tax return. 
  • You’re married and file separately, with your spouse itemizing deductions. 
  • You’re a nonresident alien or dual status alien.
  • Your tax filing covers a period of less than 12 months.
  • You’re filing taxes as an estate, trust or partnership. 

Other than those restrictions, however, anyone can claim this tax break. It’s essentially free money you might otherwise leave on the table. 

Read more about filing jointly vs. separately here

Taking the standard deduction means you can’t itemize

While the standard deduction is easy to claim, this means you can’t itemize deductions on your tax return. 

Itemizing tax deductions means that instead of deducting one lump sum amount from your taxable income, you list deductible expenses on your return individually using Schedule A. If you have substantial-deductible expenses, itemizing may yield a larger tax benefit than the standard deduction. 

You can’t claim any other deductions, either

There are certain things you can deduct on both your personal and business taxes and in some cases, you may have to itemize to claim those deductions. For example, you’ll need to itemize to deduct mortgage interest paid for the year, charitable donations and qualified medical expenses from your personal taxes. Taking the standard deduction means you wouldn’t be able to deduct those expenses from your taxable income individually. 

Note: The standard deduction applies to personal income tax only. There’s no standard business deduction if you own a business. If you run a business, you may need to claim any business expenses on Schedule C of your personal return. 

What’s the 2019/2020 standard deduction?

The standard deduction amount can fluctuate from year to year and the amount you can deduct is based on your filing status. These charts illustrate how much you can claim for the 2019 and 2020 standard deduction. 

Filing Status Standard Deduction 2019
Single $12,200
Head of Household $18,350
Married Filing Separately $12,200
Married Filing Jointly $24,400
Qualifying Widow(er) $24,400

If you’re age 65 or older, you can bump your standard deduction amount by $1,650 if you file single or head of household. If you’re married and file a joint return and you or your spouse is 65 or older, you can increase your standard deduction amount by $1,300. If both you and your spouse are 65 or older, you can increase your 2019 standard deduction by $2,600. Those same increase amounts apply for taking the standard deduction in 2019 if you’re legally blind

It’s also worth pointing out that your standard deduction amount is different if you’re eligible to be claimed as a dependent on someone else’s taxes. For example, if you’re a college student and you don’t provide more than half of your own support, your parents can still claim you as a dependent on their taxes. For 2019, your standard deduction would be limited to the greater of $1,100 or your earned income plus $350. 

Now here’s a look at what you can expect when taking the standard deduction for the 2020 tax year. 

Filing Status Standard Deduction 2019
Single $12,200
Head of Household $18,650
Married Filing Separately $12,400
Married Filing Jointly $24,800
Qualifying Widow(er) $24,800

 

You’ll see that there are slight increases across the board for the standard deduction. That means you’ll get a little bit more of a tax break when you file next year. 

The amount of the additional standard deduction you can take if you’re 65 or older or legally blind remains the same for 2020. Keep in mind that to qualify as blind for tax purposes, the IRS requires a certified letter from an eye doctor or optometrist stating that you have non-correctable 20/200 vision in your strongest eye or that your overall field of vision is restricted to 20 degrees or less. 

So, should I take the standard deduction? 

Whether it makes more sense to itemize or take the standard deduction depends on a number of factors, including your income, filing status and what type of expenses you have. Looking at both the pros and cons can help make your decision easier. 

Pros of claiming the standard deduction:

  • Simplifies tax filing, since you don’t have to spend time organizing receipts or adding up expenses. 
  • The amount of your standard deduction may be higher than what you could deduct by itemizing. 
  • Older people and the blind may be eligible for a larger standard deduction. 

Cons of claiming the standard deduction:

  • Some filers could get more of a tax break by itemizing. 
  • There are some restrictions on who can claim it (i.e. married filing separately when one spouse itemizes).
  • Your standard deduction may be reduced if someone else can claim you as a dependent. 

If you’re confused about which way to go, it may help to discuss this with a tax professional. But if you’re comfortable running the numbers on your own, a simple way to determine whether you should itemize is by adding up your deductible expenses. The IRS also has a helpful online tool that can help you determine your standard deduction amount. 

Bottom line: You should consider claiming the standard deduction if you have a simple and straightforward tax filing and you want to save time and headaches. The standard deduction doesn’t require a lot of additional paperwork to file and it’s easy to claim if you’re using an online tax software program. And, claiming the maximum standard deduction for your filing status is an easy way to trim money off your taxable income. 

Final pro tip: If you’re claiming the standard deduction and getting a tax refund, think carefully about what you want to do with it. Paying down student loans or other debts might be one option, but also consider putting some or all of your refund into a savings account to grow your cash cushion.

 

8 Things You Can Do Now to Get Ready for Tax Season

By Erica Gellerman
December 2, 2019

Every year you promise yourself that this will be the year you file your taxes early. And every year you’re rushing to file your return by midnight on April 15th. 

While it doesn’t matter to the IRS whether you file on February 1st or April 15th, there are some distinct advantages to getting your taxes done early. For starters, if you’re owed a refund, the sooner you file, the sooner you’ll get your refund money in your bank account. Plus, filing early may help lessen the risk of tax identity theft: the sooner you file, the less time is available for a thief to file a fraudulent return using your personal details. 

So this year, you’re going to get a jumpstart, right?

Here are eight tips to help you get ready for tax season now, rather than waiting until spring.

1. Get last year’s tax return

Don’t start your tax planning from scratch. There’s a lot of information which carries over from year to year. You can save yourself some time and shortcut the prep process by first digging out last year’s return. 

If you didn’t file taxes last year but will need to file this year, you’ll want to gather all of your personal documentation, including your social security number or tax ID. While you’re at it, get the information for everyone else who will be on your tax return, including your spouse and dependents. You’ll also want to make sure you have your driver’s license or state ID, if possible. Some tax preparers or tax software will ask for your driver’s license number when you file. 

2. Do a paycheck checkup

Does your employer withhold taxes from your paycheck each month? It’s important to make sure that your employer is withholding enough taxes. This way you’re not stuck with a big tax bill and penalties when tax time rolls around. 

You can use the IRS Paycheck Checkup tool to see if you’re on the right track. If not enough is being withheld from your paycheck, you can ask your employer to update this immediately and make any necessary additional tax payments required by the end of the year. 

3. Make a list of all sources of income

You may have multiple sources of income and they’ll all need to be included on your return when you file. While you won’t have totals or official forms yet, it’s a good idea to make a list of your sources of income so that when tax time rolls around, you have all the documents you need to collect. 

Here’s a list of potential forms you’ll need during tax time:

  • W2: If you’re employed, your employer will need to send you a W-2 by January 31, 2020. This form details your earnings (wages, tips) as well as your federal and state tax withholdings. 
  • 1099 Misc: Work as a freelancer? Each client should send you a 1099-misc with information about how much they paid you during the year. Starting a list of your freelance jobs now will help you make sure you receive all required forms for your taxes. 
  • 1099-G: If you received any unemployment benefits during the year, you’ll want to put this form on your list. You’ll need it to officially report the unemployment benefits you received. 
  • 1099-Div or 1099-Int: If you have cash or investments that pay interest or dividends, you should get one of these forms from every financial institution you have an account with. These forms detail any dividend or interest payments received during the year.
  • 1099-R: If you received any money from an annuity, IRA, or pension you’ll need to have this form to file your taxes. 
  • Schedule K-1: Part of a partnership? Add this to your list of documentation needed. Any partnership income received during the year will be reported on a schedule K-1. 

This isn’t a complete list of forms or documentation that you may need, but it’s a good start. 

4. List all potential deductions

Don’t skimp on this section. Deductions, while time-consuming to keep track of, can save you a lot of money. Deductions reduce your taxable income, which can reduce the amount of taxes you need to pay. 

You’ll want to start gathering documentation for anything that could possibly be a deduction, including:

  • Homeownership deductions: mortgage interest statements, real estate and personal property tax records, receipts for energy-saving home improvements.
  • Medical and health insurance deductions: track down the amount paid for health insurance as well as what you paid to doctors, dentists, and hospitals.
  • Education deductions: keep track of tuition paid to education institutions, receipts for education expenses, and student loan interest paid.
  • State and local taxes: collect documents showing everything you’ve paid in state and local taxes for the year.
  • Charitable deductions: hold onto receipts for any charitable contributions you’ve made throughout the year.

While the standard deduction may work out better for you than itemizing your deductions, it’s still good to have everything gathered so that you can decide what to do come tax time.

5. Consider retirement plan contributions

One way to lower the amount of taxable income you have for the year is to make allowable retirement plan contributions. While you technically have until the filing date to contribute to an IRA, why wait? Consider looking into options available to you to contribute to a retirement plan and reduce your tax liability. 

6. Decide whether to DIY or use a preparer

Are you going to file taxes on your own or hire professional help? Don’t wait until April to make this decision — you’ll likely won’t find many tax professionals willing to work with you that late in the game. There are plenty of programs available to help make filing on your own simple, but many people still choose to bring in a professional to help them. If you’re planning to hire help, now is a great time to find the right person. 

If searching for a tax professional, you can try using the IRS Directory of Federal Tax Return Preparers

7. Schedule an appointment

If you know that you want to enlist the help of a professional to file your taxes this year, reach out to them early. You can get an appointment with a tax preparer before they book up and they’ll be able to provide you with a list of documents needed to file your taxes. The more organized you are, the easier (and possibly cheaper) the process can be. 

8. Think about an extension

Even if you start early, there may be reasons that keep you from filing your taxes by April 15th. If you know now that you need extra time, consider filing an extension. The IRS will grant an automatic six-month extension when you request one. 

But keep in mind that this extension does not give you extra time to pay taxes that you owe. If you think you’ll owe taxes, estimate how much you will owe and start saving money to make that payment. April 15th will come up quickly and you’ll want to have that money ready to hand over to the IRS to help you avoid late fees and penalties. 

Stay one step ahead

If you want to make tax season as easy as possible, now is the time to get a head start with a little prep work. This way you can work on getting your potential tax refund as fast as possible and deposit that cash right into your savings account!

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