In the world of federal tax brackets, tax rates and IRS forms, deductions and exemptions are taxpayers’ friends. Both deductions and exemptions reduce the amount of your income that is subject to tax. A tax preparer or certified public accountant (search DexKnows to find one in your area) can help you ensure that you take all of the exemptions or deductions for which you are eligible on your 2012 federal tax return. Before you visit with your tax preparer or CPA, you’ll want to know more about deductions and exemptions.
Deductions: To standardize or to itemize?
According to the IRS website, most taxpayers have the choice between taking the standard deduction or itemizing deductions for qualified expenses. You should choose the option that gives you the lower tax.
The standard deduction makes life easier for taxpayers by eliminating the need to list, or itemize, deductions for medical expenses, charitable donations and state taxes on Schedule A of Form 1040. For 2012 tax forms, the standard deduction will be:
- $5,950 if your filing status is single or married filing separately
- $8,700 if your filing status is head of household
- $11,900 if your filing status is married filing jointly or qualifying widow(er)
The standard deduction for taxpayers age 65 and older and those who are blind is higher. The amount of the standard deduction is also affected if someone else can claim you as a dependent on his or her tax return.
Not every taxpayer is eligible for the standard deduction. You must itemize deductions if your filing status is married filing separately and your spouse is itemizing deductions, or if you are a nonresident or dual-status alien.
You will want to itemize deductions if the total amount of your deductions is greater than the standard deduction. For instance, if you paid interest and taxes on your home, or if you made substantial charitable contributions, you will want to investigate itemizing deductions.
Exemptions: Personal and dependent
Exemptions are not tied to expenses but to individuals. There are two types of exemptions you may claim: a personal exemption for yourself and exemptions for qualifying dependents. Each is worth $3,800 in 2012. On a joint return, you may take a personal exemption for yourself and one for your spouse. (Spouses are not considered dependents.)
Dependent is defined by the IRS as a qualifying child or a qualifying relative. (It’s important to note that if another taxpayer can claim you as a dependent, then you can’t take the personal exemption.) To meet the IRS standards for qualifying child or qualifying relative, a dependent must meet certain “tests” of age, relationship, residency, etc. These tests are explained fully in the instructions accompanying Form 1040.
Remember, as you prepare your 2012 federal tax returns, the best way to ensure you are taking every possible exemption or deduction is to enlist the services of tax preparer or certified public accountant — look for one at DexKnows to help you.