As you well know, tax season is rapidly approaching. If you’re a full-time employee, a majority of your tax considerations will be handled by your employer. If you’re a contractor or self-employed, your taxes may be a bit more involved and you might be wondering which deductions you qualify for. While deductions are a great way to save a little when it comes to tax time, it’s important to know which documents are and are not sufficient for tax deductions.
What qualifies as a deduction?
Many people frequently confuse tax credits and tax deductions. While both sound fairly similar, tax credits directly reduce the amount of taxes that you owe. Tax deductions, on the other hand, reduce your amount of taxable income — this in turn lowers your overall tax liability when it comes time for you to file. Don’t worry: even though deductions might not seem as exciting as tax credits, they’re just as useful for giving you a bit of extra help around tax season.
Tax deductions come in two primary varieties. These are itemized deductions and the standard deduction. If you’ve ever heard of an itemized receipt, your mind is on the right track when it comes to itemized deductions. Certain workers, especially those who are self-employed, are able to deduct certain business expenses from their overall tax liability. This includes things such as office supplies, business phones, various kinds of business meals, and, of course, your home office space. That’s right: the space you work from in your home is a deduction that reduces your tax liability.
The standard deduction is the simpler of the two. While itemized deductions often require you to hold onto your receipts and do some careful bookkeeping, the standard deduction avoids calculations, receipts, and tax forms because it’s standardized. Though the easy way out might seem incredibly appealing, especially if you file your taxes yourself or with the help of an online program, opting for an itemized deduction could prove well worth the work as it can often yield greater rewards.
This is where it gets a bit tricky. If you’re using a program such as TurboTax, it usually requires you to operate on good faith and input your deduction totals during a certain point in the filing process. While it’s always beneficial to upload supporting documentation, you’re not required to do so. It can be incredibly tempting to beef up the numbers a bit, but it’s never advisable — that can easily land you in hot water with the IRS.
If you’re using a tax preparer, make sure you have proper documentation and itemized receipts. Bank statements are great for this purpose, as they document the date and total of the purchase. However, while bank statements will often suffice for a tax deduction, providing actual receipt copies is a better idea. It shows how much of the purchase is truly deductible and is especially helpful for business meals, where certain items are and aren’t deductible. Play it safe and keep detailed records. It’ll save you the effort of having to file an amendment or answer an IRS inquiry.
Submitting your taxes
Again, online programs have the advantage of digitally transmitting your tax statements for review. The process is usually fairly speedy and ensures a quicker return. However, if you rely on an accountant or tax preparer, they’ll make sure that you have the right forms completed, review your statements, and select proper statement printing and mailing to increase the odds that your statement is accepted without hassle. There are pros and cons to both sides, so it’s best to do some research to determine what kind of service you’ll use during tax season.
Deductions provide some extra assistance throughout tax season, and they’re a great way to reduce your tax liability. They apply to a wide variety of purchases and even offer benefits for your home office space. However, don’t fudge numbers or invent expenses and make sure that you’re keeping solid records. Deductions only work well for the taxpayer if you don’t take advantage of them.