, Answering FAQ'sTurboTax Employee
Most everyone knows you can deduct certain things from your income taxes. But what is a deduction? Deductions are different from Exemptions although both reduce your taxable income.
- Exemptions are determined by the number of persons IRS rules allow taxpayers include on their tax return.
- Deductions are allowed expenses which reduce the amount of income on which you are taxed.
There are two main types of deductions, the standard deduction and the itemized deduction reported on Schedule A.
Standard Deductions vs. Itemized Deductions, and Other Deductions
A standard deduction is a fixed amount allowed for taxpayers who do not itemize (list out) their deductions. The standard deduction depends on your filing status, with an additional amount added for those over age 65 and the blind. See What is the Standard Deduction for 2013?
With Itemized deductions, the taxpayer lists certain allowable items of their spending to see if they can exceed the standard deduction amount when added together. When all of the itemized deductions exceed the standard deduction, the total deduction amount begins to increase. Now additional deductions can reduce the amount of income being taxed, increasing your refund (or lowering any tax due). TurboTax helps you step through all of the deduction areas that may benefit you.
In TurboTax, deductions are entered in the Deductions & Credits area under Federal Taxes (Personal in Home & Business edition). Be sure to check out all deduction areas for items that could benefit you!
Deductions can be confusing! There are other deductions taxpayers can use to reduce taxable income no matter which deduction (itemized or standard) is used.
These other deductions do not count to increase your itemized deductions, and appear in various separate places on your tax return, They include such things as alimony, capital and business losses, moving expenses to a new job location, student loan interest, and IRA or other retirement plan deductions.
Be sure to follow all of the TurboTax interviews to find all of the deductions you are entitled to.
Enter all of your deductions!
Even if you do not expect to be able to itemize your deductions, always enter all deductions you have. Some items may not help you on the federal return, but are used on a state return. Do not miss any deductions; enter everything and TurboTax will use them every place the deduction can help your tax situation!
Tip: In less common situations, some persons may benefit by selecting to itemize deductions on the federal return so they can itemize deductions on their state return. (States often require you to file the state return using the same filing status or selections as used on the federal return.) In this case, the state tax benefit of itemizing may be greater than any benefit lost on the federal tax return.
More about itemized deductions
Amounts you can itemize as a deduction can come on reporting forms, such as for home mortgage interest. Other deductions often have record keeping requirements for the deductions, such as for charitable giving or medical expenses. You should keep receipts, cancelled checks, and other written records of things you may use as a deduction.
You can choose to use either the standard or itemized deduction. If you file as Married Filing Separate, this ensures you and your spouse use the same type of deduction as required by law.
The standard deduction is a dollar to dollar reduction of your taxed income. Itemized deductions may have percentages attached which may not be dollar for dollar.
For example: Medical expenses must add up to more than a set percentage of your income before they begin to count as a deduction. If your adjusted gross income (AGI) was $30,000 and you are under age 65, only the amount of medical expenses exceeding 10%, or $3,000 ($30,000 X 0.10 = $3,000), can be used as a deduction. In this example, if you had $3750 of medical expenses, only $750 ($3,750 - $3,000 = $750) would count as an itemized deduction. If you are over age 65, you can deduct medical expenses exceeding 7.5% of your AGI until the end of 2016.
Why your initial refund amount does not change
TurboTax always has the goal of maximizing your return, so we start by using the standard deduction for your return. It takes a few steps before we can get into your itemized deductions (if any) and add them up. That is why you don’t see the refund amount go up (or a tax due go down) when you first start entering deductions.
First, you have to add enough deductions to exceed the standard deduction. When we see your itemized deductions increase above the standard deduction amount, we can use the itemized deductions and your refund begins to grow.
- What is the Standard Deduction for tax year 2013?
- How do I go from the standard deduction to the itemized deduction, or vice-versa?