As the tax time is approaching, I decided I should write a few articles on helping people gain some understanding about their taxes. Today I would like to cover the most talked about topic – “Itemized Deductions”. I come across a very common question all the time… Should I itemize my deductions or take standard deduction? Let us first understand what each of the term means.
Standard Deduction is a fixed dollar amount that reduces your taxable income which in effect reduces your taxes. It is easier than an Itemized Deduction and the amounts are set by the IRS. If your tax situation is not complicated by things such as home ownership, mortgages, medical expenses, employee business expenses, charities and others than you should go for Standard Deduction. The standard deduction method eliminates the need for you to go through all the hassles for you to collect all the receipts and documents that are related to the deductions. If you decide to use the standard deduction method, you are not allowed to itemize deductions. The amount of standard deduction that you will receive can vary according to a number of factors, such as your age and filing status.
Standard Deduction amount for 2011 are
- Single: $5,800
- Head of Household: $8,500
- Married Filing Joint: $11,600
- Married Filing Separately: $5,800
- Qualifying Widow/Widower: $11,600
If your Itemized deductions are more than these amounts than it is advantageous for you to itemize as this will reduce your taxable income, directly reducing your taxes. These deductions are reported on Form Schedule A. This is the form where you total up your various tax deductions item by item.
You can claim an itemized deduction for:
- Medical & Dental Costs
- Prescription drugs
- Medical Mileage and Other health care costs
- State Taxes
- Local Taxes
- Real Estate Taxes
- Personal Property Taxes such as Ad Voleram on your vehicle
- Mortgage Interest on your home
- Investment Interest expense such as margin interest
- Cash Contributions
- Non Cash Contributions
- Casualty Losses
- Theft Losses
- Non reimbursed employee job related expenses
- Uniform expense
- Union Dues
- Job Search expense
- Job related travel
- Job related education
- Home office expense
- Tax Preparation fees
- IRA Custodial and Brokerage fees
- Safe Deposit Box fees
- Gambling losses
Total overall itemized deduction also phases out based on the income. This overall dollar limitation on itemized deductions has been temporarily repealed for 2010, 2011 and 2012. This phase out will be back in 2013 unless new legislation is enacted. It is always better to ask your tax preparer to do a standard deductions v/s itemized deduction analysis for you at the tax time if you are not sure which gets you the best deductions.
The contents of this post are personal statements or opinions expressed by the author. They must not be construed as Financial, Investment or Taxation advice.