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How do tax deductions work?

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Quick Answer

Tax deductions reduce a person's tax burden by lowering taxable income, according to About.com. A filer chooses between a standard deduction or itemized deductions. As of tax year 2013, the IRS allowed a $6,100 standard deduction for an individual filer and a $12,200 deduction for a married couple filing jointly.

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Full Answer

While itemizing is longer and more complex than taking the standard deduction, tax filers should take the approach that leads to the lowest tax burden, according to the IRS. Deductions are subtracted from reported income to derive taxable income. If a person reports $70,000 in income, for instance, a total deduction of $10,000 leads to a taxable income of $60,000.

For homeowners, common taxable deductions include home mortgage interest and real estate taxes, according to About.com. Amounts paid for local income taxes, personal property taxes and nonprofit charitable contributions are additional deductions.

Because of the time involved in preparing itemized deductions, About.com encourages people to organize receipts and track deductions throughout the year. Doing so allows for ongoing comparison of the itemized amount versus the standard deduction. An organized file with receipts also minimizes the time required for preparation at the time of filing. Itemized deductions are recorded on IRS Form 1040 and Schedule A, according to the IRS.

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