Tax Analysis: Itemized Deductions - Essay Example

?Tax Research on Itemized Deductions Tax Research on Itemized Deductions The current form of the United s’ taxation is a complicated task code reform, that is usually common, that is usually common among politicians. President Ronald Regan and the Congress reformed that taxation code twice during his two-term nature in the office. He first reformed the tax code in year 1981 and later in the year 1986 (Fishman, 2012). Notably, President Reagan’s forms on taxation formed the largest tax cut that has the United States’ historic income tax cut. However, he was never the first or the last president of America to initiate reforms in the United States (Steuerle, 2008). Apparently, all the united states presidents before and after him have initiated tax reform codes. Nonetheless, his tax reform has stood to a historic tax cut. In the 1990’s, Bill Clinton lowered the middle class taxes that was followed by the year 2001’s George W. Bush massive tax cut across all incomes (Fishman, Home business.., 2012). The aim ideals behind tax reforms often aim at tax reductions; however, they do not usually simplify the tax code drastically thereby making the issue a political concern especially among politicians. Working on income tax may be a complicated issue; however, it provides people with tax deductions and tax breaks with some being unusual. The main aim of tax reduction is to reduce the taxable income in order to increase tax refund. Taxation may be carried out on either standard deduction or itemized deduction (Fishman, Home business.., 2012). The main purpose of standard reduction is the presetting income to allow a deduction on the annual taxable income. The amount deductible often varies according to an individual’s filling tax status and the annual inflation. Notably, annually, taxpayers are often capable of claiming enormous deduction on their tax returns due to itemized reductions; however, this reduction benefits never works on everyone equally (Steuerle, 2008). Therefore, regardless of the few variations, the tax reduction mechanisms are actually meeting their originally set targets. Through tax reductions under the United States tax code, the taxpayers are being relieved on large tax cuts on their annual income taxes. The Itemized Deduction This is the deduction from taxpayers’ taxable income that is adjusted to the gross income made up from deductions for money on other goods and services annually. Deductions on specific items are allowed and they often defined by the Internal Revenue Services. The itemized deductions are often conducted on income obtained from state and loan taxes, mortgage interests, medical care expenses, and gifts among other items. However, it should be noted that itemized deductions are often limited to particular percentage gross adjustable incomes (Fishman, Home business..., 2012). However, the taxpayers need to track their possible tax reduction expenses keenly in order for effective itemized reductions. Persons spending on medical care, loan and state taxes, and donations among other deductible items or expenses are better itemized (Fishman, 2012). At some points, tax law may offset a threshold in the spending that must be exceeded before deductions. For instance, in the category of medical income, may be only expenses exceeds7.5 Percent then in such a case, the gross income may be deducted. Otherwise, if an individual’s spending is much less that 7.5 percent of their spending, then their medical expenses are never deductible. Numerous difficulties are often known to undermine the nature and form of itemized deductions that often aims at reducing income tax returns (Steuerle, 2008). Notably, the itemized deductions usually fall under different categories including the student interest loans and self-employment expenses that are below the line deductions. Other deductions are from the adjusted gross income. Nonetheless, all the itemized deductions are deduced according to schedule A of the Internal Revenue services (Fishman, Home business..., 2012). The subtraction of the itemized deductions from the total taxable income leads to actual taxable income. The government created the itemized deductions as social engineering tools for economic initiatives for taxpayers to perform certain tasks including buying houses and making charities donations (Tax Alert, 2010). However, the aims and objectives of the itemized deduction are not actually achieved due to fluctuations and implementation limitations that itemized deduction are experiencing. Additionally, itemized deductions are complicated in that not all items can be customized. The itemized deductions are spread over several different sections dealing with a different type of itemized deduction. These deductions are broken down by the IRS instructions for Schedule (Steuerle, 2008). The following are some of the activities upon which itemized deduction are pegged on and their underlying limitations and difficulties that are associated with the different itemized deduction categories. Unreimbursed Dental and Medical Expenses This is the most difficult itemized deduction as well as the most financially painful itemized deduction (Fishman, 2012). Additionally, it is difficult to an individual to qualify for this deduction. However, taxpayers who often incur out-of-pocket dental and or medical expenses especially those that are never covered with the insurance are often deducted from personal expenses that exceed 7.5 percent of the gross adjustable income (Fishman, Home business..., 2012). Notably, only taxpayers who file and represent their out-of-pocket medical and dental expenses; otherwise, it would be quite difficult for the deduction of such expenses from their income before their incomes are subjected to taxation. Interest Expenses The itemized deduction often allows own homes to deduct the interest payable on their home equity credit lines and mortgages. Annually, mortgage lenders are required under this section to mail their form 1098 to borrows detailing their exact amount deductible points and interest that they have made for the period of one year (Fishman, Home business.., 2012). Additionally, taxpayers who refinanced their homes during this period are also allowed to deduct their points, but within given or specified guidelines. Just like the Medicare expenses, the interest expenses depend on the owner submission. Some of the individual submissions are ever accurate as they may contain numerous irregularities. Furthermore, the extents to which these reductions are made are never defined within this tax rate. Taxes Paid Under this requirement, the taxpayer who is itemized is only able to deduct two forms of taxes paid on the Schedule A (Steuerle, 2008). The some of the taxes within this bracket include the personal property taxes including the real estate taxes that are usually deductible along with local and state taxes that are assessable from the previous year records. However, funds that might have been received by the taxpayer in his or her previous year’s state must be considered as income only if the taxpayers itemize deductions in the earlier years. Charitable Donation All donations made by the taxpayer are qualified as charity donation; thus, they are deductible within certain limitations. The cash contributions that are above fifty percent of the taxpayers’’ adjusted gross income is only carried to the following year’s deductions. Additionally, contributions that are above AGI by thirty percent also fall within this category (Fishman, 2012). Certain Miscellaneous Deductions and Unreimbursed Job-Related Expenses The employees who incur job related expenses can subtract any aggregated expenses that only exceed toe percent of their adjustable gross incomes. The items included in this deduction include supplies and equipment, protective clothing, maintenance expenses, vehicle expenses, professional and organization subscriptions among other (Fishman, 2012). Moreover, there are certain miscellaneous deductions that including income tax preparation as well as the audit fees among other expenses related to the maintenance investments and income producing properties. Itemized deductions have a series of limitations to the taxpayer. Most of the deductions on the taxable income are all subjected to the limited amount of the itemized deductions. These restrictions were further restricted in the year 2010 (Fishman, Home business..., 2012). Nonetheless, there are times when additional reductions are realized from excess job related, and Medicare expenses thereby allowing itemized deductions to exceed above the standard reduction. This is the only advantage of the itemized deduction since it allows reduction of miscellaneous expenses even for the insufficient itemizable deductions. Proposed deduction itemization The sure way the itemized deduction should be made is through distributing limits of itemization without excluding any bracket of expenses. This can be achieved through distributing individual expenses in the order of priority. Expenses that can never be evaded must be considered vital, and their deduction must be done annually on the general income. All the deduction should be made at once without being current to the other years of deduction. The taxpayers should be give apple time to allow them submit their expenses regarding itemized deductions. For instance, if the government is conducting its taxation audit on September annually, then taxpayers should be obligated to submit their itemized deduction in July every year. The allowance of two or one and half month will allow the update of the deduction against each individual’s income towards taxation for that particular year. Recent IRS audit Itemized Deductions Activities President Lincoln introduced the IRS in the United States in the 1862. The main function is to engage in collecting individuals’ income and employment taxes as well handling gifts, corporate, estate taxes, and excise (Fishman, 2012). Notably, numerous taxpayers never want to be audited by the IRS. However, taxpayers are usually audited for around one percent though it varies annually. Additionally, some organizations and groups of people are usually audited at much higher rates than others are. The lasted audit reported researched is for the ending year September 30, 2009. During this period, individuals were audited at one percent and 138.8 million files were audited. Nearly twenty three percent of the audited individuals were one through the IRS personnel (Tax Alert, 2010). The auditors mainly focused on the high income tax payers. For instance, 6.4 percent of the total returns reflected a positive income returns with more than $1 being audited (Fishman, 2012). This result was an increase from the previous year’s 5.6 percent. The audit activities also concentrated or considered itemized deductions that included expenses incurred on horse rearing and photographs among other activities. References Fishman, S. (2012). Every nonprofit's tax guide: How to keep your tax-exempt status & avoid IRS problems. Berkeley, Calif: Nolo. Fishman, S. (2012). Home business tax deductions: Keep what you earn. Berkeley: Nolo.Steuerle, C. E. (2008). Contemporary U.S. tax policy. Washington, D.C: Urban Institute Press. Tax Alert. (2010). Get the Latest on IRS Audit Activity. Retrieved November 25, 2012, from http://www.bvccpa.com/wp-content/uploads/2010/09/2010_September_Latest_IRS_Audit_Activity.pdf Read More