Tuesday, February 15, 2011

Should I itemize on my taxes?

One of the most frequent questions I get from the folks who come to me to have their taxes done is "Should I itemize?" A lot of these clients don't even know what the question means, but they ask anyway. And the answer I always give is that we will look at their situation and determine the best answer, because the answer is different for everyone.

To explain what it means, the IRS gives everyone a standard deduction. You can choose to take the standard deduction or itemize. Typically, you will choose which ever gives you the best tax break (while it sounds silly, there is at least one good reason not to choose the best, but I'll ignore that for now). This deduction is the amount of your income that is not taxable. Supposed you're single and make $50,000 a year income. You won't have to pay taxes on the entire income, the first $5700 is not taxable.

The standard deduction as mentioned about is $5700 for single people or for married people who file separately. For married people who file together, the deduction is exactly twice the single deduction or $11,400. There is another class of people, Head of Household and their deduction is $8400. I won't go over those choices in this blog post, I'll assume you know which filing status you fall into.

In order to decide on itemizing, you can simply look at your items and see the total. If they total more than the standard, you're better off itemizing. So what items are significant? My experience is that home mortgage interest is typically the larges. If your home is mortgaged, you should get a from from your bank that tells how much interest you paid.

People of faith also tend to have charitable contributions. And of course we all pay state taxes, you can choose to deduct your state income tax or state sales tax. Don't forget real estate taxes and property taxes on your automobiles. If the total of all of these items exceeds the standard, by all means itemize.

There are two other areas that are common: Medical expenses and miscellaneous deductions. Each of these is subject to some minimums. For example, medical expenses that exceed 7.5% of your income are deductible. For the person listed above making $50,000, that's $3750. If your expenses are less than that or are covered by insurance, you can't deduct them. If your expenses are higher, you can only deduct the difference. For example, if your expenses are $5000, you can only deduct $1250.

For miscellaneous expenses (job travel, union dues, etc), these have to exceed 2% of your income.

I purposely omitted Casualty and Theft losses as they aren't that common. By all means you should study the law yourself and not take my comments as always true. But hopefully, this will help you decide if you want to itemize.


DF said...
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DF said...

I typically try to omit deduction that are "not common" as well. I figure that if I am audited and they find a mistake elsewhere maybe I can balance it out in some way by pointing out I didn't claim something else. I always try to be accurate though. Its sad we all have to devote so much time and effort to protecting our hard earned money from the government.


Randy said...

DF, Welcome to my blog. I've always deducted everything I could, but I also document my deductions, so that I have proof of the deduction.

I think it was Will Rogers who said "I'm happy to be an American and I'm happy to pay my taxes. But I could be a whole lot happier for a whole lot less money."