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Income Tax Return Forms - Part 2

What is income tax return forms?

So what we know so far is your employer withholds money from your paycheck to pay your income taxes. There are variables that will reduce the amount of taxes you owe such as being married or having kids. You file your income taxes to determine if you've had too much withheld from your employer or not enough withheld from your paychecks through your employer.

So  question is how is the income tax amount determined?

The answer it's a percentage of your taxable income.

So unfortunately filing your taxes is not as simple as just knowing how much income you've made. There's a lot that goes into it. So you have to find something called your taxable income your taxable income is the amount used to calculate the taxes you owe. Once you have subtracted two new things deductions and exemptions from your total income.

So it looks like this.
We have our total income. In other words the amount you made that last year minus deductions minus exemptions to find are taxable income deductions and exemptions will be talked about on the next few But this is the overall way it works you get your the amount you've made take out deductions take out exemptions to find your taxable income.

So deductions are expenses that you can subtract from your total income to determine your taxable income and there's two types of deductions you can choose.

Standard or itemized so with standard deduction and everyone gets one or the other standard deduction is a set dollar amount that is determined by the government every year. It's the same per person no matter what no matter how much you make standard deduction to be the same dollar amount for everybody and the itemized deduction is if you want to itemize some expenses and it's that amount is based on a cumulative amount that is calculated based on very specific expenses But the standard deduction amount for 2017 is six thousand three hundred and fifty dollars. So in other words everyone if they choose a standard deduction can reduce their total income by the amount to find their taxable income Or if you itemize the amount you get to deduct from your total income based will be based on how much you've spent on certain expense categories.
So everyone chooses one or the other. Everyone choose a standard for itemized deductions. So every person defaults to a standard deduction. In other words every person gets this amount to reduce their income by to pay taxes on. If you have spent certain amounts of money or some have if you've spent money in certain categories and especially if you've spent more than six thousand three and fifty dollars in those certain categories you would choose to itemize your deductions.

So the certain expenses that you can add together. So if you have throughout the year paid money towards mental medical or dental expenses up to a certain amount certain types of taxes that you've paid certain types of interest like home mortgage interest. There's different miscellaneous expenses and such as professional expenses tuition certain bank fees if you've paid any of these or if you've made money you're given money towards terrible charitable contributions you can choose to itemize your deduction. So that's why when people donate money to a nonprofit they know they can donate that money and it will go towards the amount that they can itemize. They're getting a deduction to itemize. So the way this works is when you fill it out your income tax return form it will ask you very specific questions to determine whether you should take the itemized deduction or the standard deduction. And I have some examples to help us understand this more.

So a little review first every person automatically receives the standard deduction. You may choose to itemize to do an itemized deduction if you've spent enough money in specific expense categories. 

Here's our example.
Person A let's call her Sarah.

Sarah made a charitable donation of fifty dollars to St. Theresa's but she made no other itemized qualifying expenses. She should choose a standard deduction of six thousand three and fifty dollars because that is more money than the fifty dollars and again this deduction reduces the amount that you have to pay taxes on. So we want to reduce our amount as much as we possibly can.

Person B will call her Katie.

Katie made a charitable donation of ten thousand dollars to St. Theresa's and has paid two thousand dollars in mortgage interest. So she should choose to itemize her deduction because she will be able to reduce their to her taxable income down by twelve thousand dollars total And again we're trying to get that number that taxable income as low as possible because that's the amount we're going to use to figure out how much we owe in taxes. So that was deductions. Here are exemptions the other way you can reduce your taxable income.