The federal and state governments expect taxes to be paid on "taxable" income. In general, taxable income is the net amount remaining after subtracting your "personal exemption credit(s)" and either your "standard deduction" or your "itemized deductions" from your total (or gross) income for the year. You should understand how these deductions work.
One or more personal exemption credits are given to every person in the country. The value of each exemption credit in 2005 is $3,200. If you're single, you have one credit automatically. If you're married, you have two. Each child adds one more.
Depending on your situation, however, the credit may go to somebody else. If your parents are still helping you out financially, you may qualify as their dependent (they must be paying more than half your expenses), in which case they can use your credit on their tax return, meaning you can no longer use it on your own return. Conversely, if you are paying more than half of someone else's expenses (that someone being subject to certain qualifiers), you can claim their credit on your return.
In general, the amount of the standard deduction varies according to your filing status. If you are filing "single," the standard deduction for 2005 is $5,000 (up from $4,850 in 2004); if you are "married and filing jointly," the deduction is $10,000.
Therefore (and using a simple generalization), if you are single (with one exemption credit of $3,200) and choose to take the standard deduction ($5,000), you can subtract $8,200 from your income. If you're in the 15% tax bracket (your remaining taxable income is greater than $7,300 but less than $30,000), that savings is equal to $1,230 (or 15% of $8,200).
If you can write off even more than the IRS set amounts, every additional dollar subtracted from your income beyond the "standard" $8,200 will save you 15 cents on the dollar, or $150 on every $1,000. Furthermore, as your income increases, so does the percentage at which you are taxed. When your taxable income passes $30,000, you jump to the 25% bracket, making every additional $1,000 you can subtract from your income worth $250 in tax savings.
Obviously, it's very beneficial to make use of deductible expenses if they exceed the "standard" amount. But to do so, you must "itemize" those deductions for the IRS by including additional tax forms with your return, hence the phrase "itemized deductions."
Everyone can write off common expenses like medical costs, charitable contributions, and taxes paid (such as personal income taxes, sales taxes, and property taxes). In addition, many taxpayers—such as performers—have business-related expenses that were incurred in earning their income and that can be written off. Future columns will deal in greater depth with the specific deductions related to acting, but those costs can include classes, headshots, automobile and transportation expenses, agent and manager commissions, union fees, and more.
Exceeding the standard deduction is fairly standard (forgive the pun) for most performers. Spend $200 a month on classes and you already have $2,400 for the year. Add pictures, auto expenses, and agent commissions, plus the more-common expenses, and it's not hard to beat the standard deduction of $5,000.
But itemizing does require keeping receipts and records to prove your write-offs. Admittedly, if a performer has deductible business-related expenses of just $4,000 (or less) in a year, it is possible that his or her itemized deductions may be worth only a few hundred dollars more than the standard deduction.
So why bother doing all the work necessary when the rewards may be so little? Because no one enters the entertainment industry without the expectation of building a successful career, and the more successful you become, the more income you will make and the more costs you will incur.
Just as taking acting lessons today prepares you for performances tomorrow, you should be preparing to preserve every dollar you earn from those performances. Considering how grueling and expensive it is to earn a living in this industry, you should do everything you can (legally) to keep your earnings in your own pocket, not the government's.
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