Although doing taxes can be a challenging, when it is done right, the US tax code offers taxpayers a number of ways to reduce their liability and save money. Itemizing deductions is the best way for most people to reduce tax liabilities, but only if they have enough deductions to itemize. Once a taxpayer decides to itemize, it is important form him to save justifications for his deductions and that he take every deduction that he is entitled to. In addition, taxpayers can spread their tax savings throughout the year by having their employer adjust how much tax is taken from their paycheck.
Although most taxpayers look at itemizing deductions as a panacea, the reality is that the standard deduction can actually be a good deal for many people. As an example, in the 2011 tax year, a married couple filing their tax return together can claim a standard deduction of $11,600. If the couple does not have itemized deductions worth a greater amount, their tax bill will be lower if they just claim the standard deduction.
Taxpayers who think they might be itemizing deductions at tax time should take care to claim every deduction to which they are entitled. While the deductions for home mortgage interest, state and local taxes, and charitable contributions are well known, other expenses are also deductible. Unreimbursed employee expenses that are over 2% of adjusted gross income (AGI) and medical expenses over 7.5% of AGI can be written off, as can the cost of certain losses which were not covered by insurance. Deduction itemizers can even write off their tax preparation fees.
Itemizing deductions does increase the likelihood that a tax return will be selected by the Internal Revenue Service (IRS) for an audit. It is important to maintain documentation for every claimed deduction. While a mortgage interest deduction is easy to substantiate with a copy of the "Form 1098 Mortgage Interest Report," other deductions are harder to substantiate. For example, charitable givers should save receipts from charities for cash or property gifts, and those who wish to claim mileage expenses should keep a mileage log with trip dates, purpose, and odometer readings.
For many people, receiving a large tax return is not only an annual gift but also tangible proof that they did a good job of maximizing their itemized deductions. A large tax return also means that that taxpayer allowed the IRS to take too much money from them, over the previous year, and to use it, without paying any interest. Taxpayers who can itemize their tax deductions to the point of receiving a return should work with their employer to reduce the amount of tax taken out of their paychecks. This increases the amount of income that they can keep when they earn it.
