Most of us loathe the very idea of doing our U.S. personal income taxes, not because we expect to get fleeced each April 15 (or 16) but simply because we don't know an adjusted gross income from a standard deduction. For the many tax code illiterates among us, Salary.com has combed through the Internal Revenue Service website, taking inspiration from Sarah Young Fisher and Susan Shelly's book The Complete Idiot's Guide to Personal Finance, to come up with a checklist that may help simplify your tax-filing experience.
Taxable and nontaxable income
To get things started with the very basics, below is a list of everything the government considers taxable income.
The following nontaxable income is safe from Uncle Sam's clutches.
Everybody wants to reduce his or her taxable income as much as possible. The first place to start is with adjustments, which are special types of tax breaks or deductions the government lets you subtract from your income, thus reducing the amount of tax you pay. One adjustment that might save you quite a bit is if you have contributed as much as possible to tax-sheltered accounts. Another type of adjustment is the expense you incur from moving. For example, if you took a new job at least 50 miles from your old one, you could deduct the cost of changing homes and driving expenses. A third adjustment is possible if, for example, you're still in the first 60 months of repaying student loans, in which case you may deduct interest paid (up to $2,500). Other potential adjustments would be alimony paid and bad debts, but they are subject to strict rules and can be researched further at the IRS website.
Standard and itemized deductions
Deductions can be beautiful if you figure out which ones apply to you. While legal deductions are many and varied, don't expect a free-for-all. If you start itemizing a broad spectrum of expenses you must prove you qualify with supporting documents. Everyone gets to choose between a standard deduction and an itemized deduction. The goal is to use the one that most reduces your taxable income.
If your financial situation is reasonably simple - that is, if you don't own property, run a business from home, or manage a lot of investments - you're probably best off taking the standard deduction. The standard deduction is a fixed dollar amount Congress allows all taxpayers to subtract from their income, even if they don't participate in activities that are deemed deductible by the government. For the year 2000, single persons get a standard deduction of $4,400. Those filing as head of household, which typically refers to divorced or single parents, get a standard deduction of $6,450. Married persons filing jointly, or qualifying widows and widowers, get a standard deduction of $7,350, while married persons filing separately get $3,675. You cannot take the standard deduction if you or your spouse claim itemized deductions.
Itemized deductions are accounted for on Schedule A of IRS form 1040. Itemizing simply means listing the specific items that are deductable according to current tax rules, and then subtracting their costs from your taxable income. This may be the best option for you if your financial life is somewhat complicated or, if, for example, you've had a large number of medical bills, or significant loss. The following expenses can be itemized as legitimate deductions.
The following expenses can also be itemized, but only if they total more than 2 percent of your adjusted gross income.
Unfortunately, none of the following qualifies as a valid deduction.