Join Jim Stice for an in-depth discussion in this video Itemized deductions, part of Finance Foundations: Income Taxes.
- Now that we've worked through the entire Form 1040A for Ramona and Kay, and seen that they're getting a tax refund of $2,194, let's add a little complication. Remember they took the Standard Deduction, $12,200, kind of an average amount that people might spend on socially desirable functions. Well, what if Ramona and Kay spent more than $12,200? Well, the tax law gives them the opportunity, if they want to, to itemize their deductions. If they're going to do that though, they can't use the Form 1040A.
They have to use Form 1040, Schedule A. They've got to go the more complicated form. But it's not that much more complicated. They just need to list down the carefully collected data for amounts that they've spent for state and local income and property taxes. And for people who itemize their deductions in 2012, they spent an average of $9,385 on home mortgage interest. And these people in 2012 who used Schedule A in Form 1040 spent an average of $4,789 on charitable contributions.
So, you would see why these people would want to itemize their deductions rather than using the $12,200 Standard Deduction. Just a little wrinkle that makes it a little more complicated. And really the biggest complication there is in the recordkeeping because, again, the burden is on you to demonstrate that you have actually spent the money for those items so that you can itemize your deductions. Now, the easiest tax form for individuals in the United States is Form 1040EZ. The hardest one is Form 1040. We've worked through the intermediate one, the short form, Form 1040A.
And we've seen that it's not too bad. It looks kind of intimidating, but if we take it step-by-step, item-by-item, we can see that in Ramona and Kay's case, it wasn't too hard. They had their documents available. We filled out the numbers, and we found out in the end, they got a refund of $2,194. And we helped them do it, work through their Form 1040A.
This is a self-contained introductory course to income tax, but if you'd like more information about accounting in general, check out the Stices' foundational course, Accounting Fundamentals.
NOTE: The information in this course applies only to the United States.
- The history of income tax
- Tax brackets, rates, deductions, and credits
- Completing a basic tax return (1040A)
- Tax planning
- Shifting income
- Understanding corporate income taxes
- Avoiding tax-evasion schemes
- Tax issues for small businesses