What it is:
How it works/Example:
There are two kinds of tax deductions: standard and itemized. A standard is a flat amount that applies to all qualified . An itemized deduction requires calculations, proof of a qualifying expense, and time to fill out extra IRS forms at tax time. A 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 be taxed on $100,000 - $10,000 = $90,000. If your 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 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 Standard deductions are deductions usually take advantage of if they don’t qualify for other deductions. Though taking a standard 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 .in the United States.