Itemized deductions: are a list of several individual deductions that are different from person to person based on your financial life.If you choose this route, you only take the one deduction. Standard deduction: As the name implies, a standard deduction is a set amount based on filing status.There are a few ways to take below-the-line line deductions: standard vs. While both can help reduce your taxable income, itemized deductions are simply a method to take deductions. You may be eligible for a student loan interest deduction for up to $2,500 interest paid on a qualified student loan. It’s an above-the-line deduction, which means you can take the deduction even if you’re not itemizing. And, if you meet the income requirements, you can offset your income with the amount of your contribution. Setting aside retirement funds in a retirement account is a worthwhile effort to save for retirement and score tax benefits. Above-the-line deductions are often confused with itemized deductions, but they are different.Ĭommon above-the-line deductions include: IRA contributions Below-the-line deductions are taken after your AGI has been calculated to determine your overall taxable income. below the line.Ībove-the-line deductions are used in calculating your Adjusted Gross Income (AGI). One of these concepts is whether the tax deductions are above-the-line vs. Understanding deductions gets a bit tricky because they fall into different categories, which can impact when you can use them. That deduction would then lower your taxable income by $120. Let’s say a deduction is valued at $1,000 and you’re in the 12% tax bracket. Tax deductions lower your taxable income, which in turn can lower your tax bill. Make use of tax deductionsĪnother beneficial way to boost your refund is through tax deductions. (Related: Go deeper to discover the difference between credits vs. That could mean missing out on thousands of dollars back with this refundable credit. For example, only four in five eligible taxpayers claim the Earned Income Tax Credit. Many taxpayers leave money on the table with tax credits simply because they don’t know they exist. So, for a $1,000 tax credit, you’ll shave $1,000 off your total tax bill. Compared to tax deductions, they can be better tax refund boosters because they offer a dollar-for-dollar tax reduction. Tax credits are a valuable source of tax savings. You can leverage tax pros or online tax programs to determine the best filing status for you for the given tax year. While choosing the Married Filing Jointly filing status is advantageous for many taxpayers, there may be times where choosing the Married Filing Separately filing status is appropriate. It can be claimed by a separate filer with less than $200,000 in adjusted gross income (it’s $400,000 for joint filers).
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