Intuit Academy Tax Practice Exam

What is a common way to reduce tax liability on an individual tax return?

1. Standard Deduction

2. Health Insurance Premiums

3. Retirement Savings Contributions

4. Investment Losses

The correct answer is: Standard Deduction

The standard deduction is a significant factor in reducing tax liability on an individual tax return. When taxpayers choose the standard deduction, they can subtract this fixed amount from their total income, thus lowering their taxable income for the year. As of 2023, the standard deduction amounts vary depending on filing status (single, married filing jointly, etc.), and it simplifies the tax preparation process since taxpayers do not need to itemize their deductions. This deduction is especially beneficial for individuals who may not have sufficient qualified expenses to itemize, making it a straightforward and effective way to lower taxable income and, consequently, tax liability. While health insurance premiums, retirement savings contributions, and investment losses can also influence tax liability, they often involve specific conditions and limitations. For example, health insurance premiums may only reduce taxable income to the extent that they are paid with pre-tax dollars or are deductible for self-employed individuals, and retirement contributions have caps that vary by age and type of plan. Investment losses can offset capital gains but may not provide a straightforward reduction in overall taxable income like the standard deduction does.