How Deductions Work

When you file your taxes, the amount of taxes that you eventually have to pay is based on your taxable income. Your taxable income does not necessarily equal the total amount of money you make for the year. Your total income is reduced by tax deductions to come up with your taxable income. If you can lower your taxable income, this lowers your tax liability. When choosing the best way to lower your taxable income, you can choose between a standard deduction that is allowed by the Internal Revenue Service or you can itemize deductions individually.

Choosing Between Deduction Methods

The standard deduction is the simplest method available for reducing your taxable income. The standard deduction is a fixed dollar amount that everyone in a particular filing class can claim if they choose to do so. By comparison, if you have a large number of deductions, you can choose to skip the standard deduction and take individual deductions for each item. Itemized deductions give you the ability to lower your taxable income by the greatest amount, but at the same time, it is more complicated than taking the standard deduction.

Standard Deduction

The amount of the standard deduction can vary from one year to the next and it varies, depending on your filing status. For instance, in the year 2010, the deduction for individuals was $5,700 per year. This is also the number that married couples filing separately can claim. When you are married, the total amount that you can deduct on your taxes with the standard deduction is $11,400. Filing as a head of household gives you a standard deduction of $8,400. The total amount of the standard deduction can be increased from year to year based on inflation.

When to Choose

You should choose to take the standard deduction when you total up your potential itemized deductions and they come up to a lower amount than the standard deduction. For instance, if you are a married couple and you add up all items that could count as an itemized deduction and the total comes up to $9,000, it would be in your best interest to take the standard deduction. If the amount of your itemized deduction is greater than $11,400, you would be better off to itemize.