While filing income taxes is a routine procedure, the continually changing regulations make it a tricky one. In order to file an accurate return, it is always necessary to know the tax rates, deductions and credits for which you are eligible.
Firstly, is your income ordinary income, or income from capital gains? Capital gains are the proceeds from the sale of any investment property, for example real estate. Long-term capital gains - over one year - are taxed at lower rates than short-term capital gains or ordinary income.
Secondly, do you earn income from passive sources? Passive income, for example, can come from a resource paper you have written on the Internet that continues to generate revenue two years after you wrote it. The tax laws for such income continue to change, as the government tries to prevent people from exploiting such sources to get non-taxable income.
Thirdly, what deductions are you eligible for? Taxpayers are given a choice between paying standard deduction and itemized deduction, whichever is higher. The standard deduction is a fixed amount off the taxable income, while itemized deduction is calculated from a list of allowed items determined by the government. Standard deduction is government-given, but itemized deduction needs verification. So if itemized deduction only offers minimal benefits over the standard, most people choose the safer route.
Allowable items for itemized deduction include -
1. Medical expenses, over and above 7.5% of Adjusted Gross Income(AGI). This includes medical insurance premiums, out-of-pocket medical expenses, payment for medical equipment, costs for travel to/from medical facilities and more. Cosmetic surgery, OTC drugs and health club memberships are not tax deductable.
2. State and local taxes already paid are deductible from your federal return.
3. Mortgage interest expense on homes, up to two in number
4. Charitable donations
5. Cost incurred due to theft or casualty
6. Gambling losses, upto a maximum value equal to the gambling income. If gambling losses exceed gambling income, the excess loss is not tax deductible.
There are various conditions that make you eligible for deductions over and above the standard deduction. For example
1. Age above 65
2. Blindness
3. If married and filing jointly, if age of spouse is above 65 and/or said spouse is blind
Dependents are eligible for standard deductions equal to their income plus $300(as of 2009), with a minimum fixed amount that must be deducted from the guardian’s taxable income. There is also a maximum standard deduction for dependants, above which the income of the dependant will also be taxed.
Fourthly, income tax rates depend heavily on your filing status. Are you single, married and filing separately, married and filing jointly, or the “head of household”? People who live with dependents - children, step-children, grandchildren or step-grandchildren - are eligible for more favorable tax brackets, the same as married people filing jointly.
The rules for tax deductibles change every year, and the list for itemized deductions is slowly becoming smaller and smaller. While filing your tax return, always check the latest regulations for information on tax deductibles. Incorrect claims may lead to a lower refund at best, and to a charge for fraud at worst.
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