With income tax filing time upon us, you need to be asking yourself whether you should itemize or take a standard deduction. If talking taxes makes your head hurt, I beseech you to stick with me for two reasons: 1) this is simple stuff and 2) understanding these two types of deductions could save you hundreds of dollars on your return.
If the total of your itemized deductions is greater than your standard deduction, you will choose to itemize. Why? Because every itemized dollar above that standard deduction will give you a bigger refund. Simple. Right?
What is a standard deduction?
Any deduction effectively lowers the income level you pay taxes on. A standard deduction is the default amount Uncle Sam gives everyone. The standard 2011 tax deductions are:
- Single — $5,800
- Head of household — $8,500
- Married Filing Joint Return — $11,600
- Married Filing Separately — $5,800
- Qualifying widow/widower — $11,600
- Dependent — $900 to $5,800
Most of you will have a standard deduction of either $5,800 (single) or $11,600 (married).
What is an itemized deduction?
As the name indicates, an itemized deduction is the total of allowable deductions which you spent in 2011. Think of itemized deductions as a treasure hunt – if you are single, you need to find more than $5,800; if you are married, you need more than $11,600.
Allowable itemized deductions are:
- Medical and dental expenses which exceed 7.5% of your adjusted gross income
- Taxes (state and local income taxes, property taxes and state sales tax)
- Interest expenses, such as home mortgages
- Charitable contributions
- Casualty and theft losses which exceed 10% of your adjusted gross income
Let’s say your year-end statement from your mortgage company says you paid $8,800 in mortgage interest in 2011. If you are filing married joint return, you have not reached the standard deduction of $11,600. However, if you gave $6,000 in charitable contributions, your total of itemized deductions is now $14,800 ($8,800 plus $6,000), meaning you should definitely itemize. It is time to continue your treasure hunt with the other allowable deductions, starting with the taxes you paid. Remember: every additional dollar you can claim will increase your refund.
If the total of your allowable expenses leaves you short of the standard deduction, go with the standard deduction.
That is all there is to it. I told you it was simple.
Readers: Did this explanation help you better understand itemized versus standard deductions? Which do you claim?