Ah, the classic question. Should I use the standard deduction or itemize? The answer is “simple” of course–you should use whichever deduction results in paying the least amount of taxes. While tax software can figure out the best approach, it’s still helpful to understand the difference between taking the standard deduction and itemizing. So let’s take a look at both.
Factoid: According to the IRS, nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
The Standard Deduction
Every tax-paying income earner is entitled to what is called a standard deduction. The standard deduction is a flat dollar amount by which you can reduce your taxable income, thus reducing your tax liability.
The standard deduction varies depending on your filing status. On top of that, the amount generally rises every year based on inflation. For 2011, the standard deduction is as follows:
- $11,600 for married couples filing a joint return (up $200 from 2010)
- $5,800 for singles and married individuals filing separately (up $100 from 2010)
- $8,500 for heads of household (up $100 from 2010)
In addition, there is an additional standard deduction for blind people and senior citizens of $1,150 for married individuals or $1,450 for singles and heads of household.
To Itemize or Not To Itemize, That is the Question
To determine whether you should take the standard deduction described above or itemize, you’ll need to add up your itemized deductions. If your itemized deductions are more than the standard deduction, you itemize. If not, you stick with the standard deduction. Easy peasy lemon squeezy, as a friend of mine likes to say.
So what expenses can be included if you itemize? Things that may be claimed as itemized deductions include:
- Real estate and property taxes
- Interest paid on a home mortgage or student loans
- Cash contributions to charities and churches
- State and local income taxes and/or state and local sales taxes
- Interest paid on investments (such as margin interest)
- The fair market value of non-cash contributions to charities and churches
- Personal losses due to theft or injury
- Job-related expenses—if your employer did not reimburse you
- Union dues
- Any cost of purchasing or cleaning uniforms
- Job-related education and professional development
- Job-related travel
- Home office expenses
- Tax preparation fees
- Investment fees and expenses (this includes annual brokerage fees and IRA custodial fees)
- Safe deposit box fees
- Any necessary expenses related to self-employment income
Keep in mind that there are limits for some of these deductions. For example, you can deduct medical expenses only to the extent that they exceed 7.5% of your adjusted gross income.
If the total of your allowable itemized deductions is more than your allowable standard deduction, you have your answer and need to itemize your deductions on Schedule A. And if it turns out that the standard deduction is more advantageous, take pleasure in the little victory of filling out a lot less paperwork.
One additional note to married filers filing separately. Keep in mind that you must both select one type of deduction. That is, you must either both itemize or both take the standard deduction. You cannot mix and match between the two types of deductions.
Finally, for anyone who is confident that itemizing will be advantageous, remember to look into every deductible expense you can. Remember, every dollar deducted will save you between 15 and 35 cents depending on your tax bracket, so if you can deduct $1,000 off your tax bill, that’s an extra $150 to $350 in your pocket!
Published or updated March 31, 2012.