Ah, the classic question. Should I use the standard deduction or itemize? The answer is simple of course: you should use whichever deduction is greater, thus saving you the most money on your tax bill and keeping the most money in your pocket. We’ll figure out just which of those is the greater saver by the end of this article, but first, let’s explain both.
Every tax-paying 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. By US tax law, you may claim whichever is higher of the standard and itemized deductions. Which, naturally, is the one you should choose.
The standard deduction varies depending on your filing status. In tax year 2009, for example, the standard deduction for an individual was $5,700. Married couples filing jointly could deduct $11,400; couples filing separately could deduct $5,700; heads of household could write off $8,350; and qualified widowers could deduct the same amount as married couples.
To determine whether you should take the standard deduction or itemize, you’ll need to add up your itemized deductions. 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
- Health care: Medical and dental expenses, prescription drugs
- 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.
Now that you know what you’ll need to know, gather all the documents that contain any of this information. This will include property tax receipts from your town, documents from your bank that note the amount you paid in mortgage interest this year, health care bills and receipts, state tax returns, receipts documenting job-related expenses for which you were not reimbursed, federal income tax paid and so on. Once you have put together that imposing pile of paper, go ahead and add up your deductible expenses. If the total 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 deduction.
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 so if you can deduct $1,000 off your tax bill, that’s an extra $150-350 in your pocket!
If you need help filing your taxes this year, you may want to consider both Turbo Tax and H&R Block. Their free online tax software can make your tax nightmares disappear.
Published or updated August 18, 2011.
{ 2 comments… read them below or add one }
It’s a shame that this is even a question, but given our absurdly complex tax code, we have no choice but to invest valuable hours looking for ways to reduce our bite.
In an efficient world, our tax code wouldn’t have special exemptions for everyone from displaced coal miners to people with gambling losses. Instead, we’d each enjoy the same basic personal deduction – say $20,000 – and pay a flat rate, 17% or so, on the remainder. Rich people would pay their fair share instead of concealing their money in unproductive shelters. Poor people would barely feel a thing. And the middle-class could spend their time earning money and enjoying their non-work hours instead of saving receipts, keeping records, and cutting checks to H&R Block.
I’ve always heard a simple rule of thumb: if you don’t have a mortgage, it probably makes sense to take the standard deduction. That’s not always true, but it seems to work for most people that don’t have pretty unusual finances. If its a close call, its a heck of a lot easier to just take the standard deduction!