Standard Deduction or Itemized Deduction??

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

Many of the items listed in the above list have certain threshold of their own. For instance the amount of medical expense that can be deducted is the amount spent over 7.5% of Adjusted Gross Income (AGI). Any medical expense under that is not deducted. Gambling losses are deducted only up to the extent of gambling winnings. Job related expense and miscellaneous deductions are deducted only if they are in excess of 2% of AGI. Charitable contributions and casualty & theft losses too have certain limitations and threshold amounts.

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.

Should we be concerned with the oil prices!!!

Oil prices are hovering more than $100 per barrel for some time now. This is not the first time it happened. A few years ago oil prices first hit this level and there was an absolute chaos all around. Everyone was talking about oil prices being close to $4 per barrel. People started driving less, buying fuel efficient vehicles or exploring alternate energy options. Economy soon collapses and we went in a recession pushing oil prices much lower.

This time again it is over $100 per barrel for few days and much of the economy is weak. This time there is no blame on the commodities market or high oil consuming nations and people hardly even talk about it. Looks like high oil prices have now become part of life. Oil prices started soaring again with some positive results out of the economy. Yes if the economy goes back into recession, oil prices will drop again. But the drop will be temporary. If the economy starts performing at full throttle than the prices would once again soar high. It is difficult to imagine as to what prices we would see on oil if the economy performs at full potential.

It is acceptable for the oil prices to move with the economic boom and bust… but do the current economic condition justify $100 per barrel?

The views expressed in this article are sole opinion of the writer. It does not intend to provide any investment or financial advice and should not be relied upon to make any kind of investment decision.