Taxes

Taxable Income

Deductions From Taxable Income

Now that you've calculated your AGI, it's time to translate that information into what your actualy tax liability may be.  What's the first step?  Going from your AGI to your Taxable Income.

Your taxable income is found by the following formula:

AGI - Standard Deduction/Itemized Deductions - Personal Exemptions = Taxable Income

After finding your taxable income, you can calculate your tax liability from the specific IRS Tax Tables or their Tax Rate Schedules. These tables will answer this question: "If my taxable income is X, what's my federal income tax rate?" www.irs.gov/Individuals
Tax Table at https://www.irs.gov/forms-pubs/about-form-1040

More Deductions - Standard Or Itemized

Again, now that you've determined your AGI, you can next apply a second round of deductions in the form of either a ‘standard deduction’ or ‘itemized deductions’ in an effort to reduce your taxable income even further. You'll want to choose either "standard" or "itemized," depending on which one allows you to lower your taxable income the most.

Standard Deduction

A standard deduction is a specific dollar amount an individual can claim to reduce their taxable income.  this is the most simple and straightforward deduction, and one used by most taxpayers.  The amount of your standard deduction will be defined by your filing status.

Here is a list of the standard deduction associated with the various filing statuses, along with a brief summary of the requirements for that status, as of December 31, 2013.  The below amounts are for 2013 only, and they change yearly:

• Single $6,100
• Married, filing jointly $12,200 (this applies to most married couples)
• Surviving Spouse $12,200 (if your spouse died in 2013)
• Head of Household $8,950 (if you're unmarried, support a dependent child living with you)
• Married, filing separately $6,100 (rarely a better deal, but in certain circumstances, less tax owed)

Note: if you are over age 65 or blind, you may be entitled to additional standard deductions that range from $1,200 to $1,500 each.

Itemized Deductions

Certain specific expenses qualify as deductions for your taxes and, very often, the sum of those expenses is more than the standard deduction amount.  Most itemized deductions are subject to the 2% of AGI rule.  What this means is that the sum of your itemized expenses greater than 2% of your AGI is deductible.

• Qualified medical expenses (if they exceed 10% of AGI)
• Taxes, such as real estate tax on your home (if you own it), sales tax, state income tax paid
• Charity in cash or goods (must be able to prove amounts, and donations can only be to US qualified charities with certain limited exceptions. i. f(Foreign charity generally isn't eligible for a deduction)
• Interest paid on your mortgage (if you own your home) - interest on your car loan, furniture loans, credit cards, etc. is not deductible

Should you Take the Standard or Itemized Deduction?

You can only take one or the other, and the choice is very simple. You want to compare both deductions and take whichever of the two is higher. While it certainly takes some extra work and might require the assistance of a tax professional, often times people who take the time to calculate their itemized deductions are pleasantly surprised to find that these exceed the standard deduction allowable for their respective filing status. Remember, similar to the gross income deductions that reduce your AGI, the higher this number, the lower your eventual tax bill to the US government.

Personal Exemptions

(these can get complicated, especially if you are taken as an exemption on your parents tax return)

Personal exemptions can also reduce your tax bill. Here’s an overview of how to calculate your personal exemptions.

You can take one exemption for yourself unless you can be claimed as a dependent by another taxpayer. If another taxpayer (such as your parents) is entitled to claim you as a dependent, you cannot take an exemption for yourself even if the other taxpayer does not actually claim you as a dependent. If you are married, you may be allowed one exemption for your spouse.

Exemptions for Dependents

You may also be allowed to take an exemption for each of your dependents (such as your children or elderly parents). "Dependent" includes: a qualifying child or a qualifying relative.

More information regarding the rules for claiming dependents can be found at:
www.irs.gov/publications/p501/ar02.html#en_US_2012_publink1000220858