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.
The basics:
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
An Example:
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?
This great and very helpful! Thanks, Joe 😀
Thanks Alex. People often tune out any talk of taxes because they assume they can’t understand it. Hopefully, this post will disprove that assumption.
If one’s spouse passes, is “widow” a permanent status, or does that expire after some time?
Great question. No, the status is not permanent. Here is an explanation from about.com:
“Surviving spouses receive the same standard deduction and tax rates as taxpayers who are married filing jointly. In the year of your spouse’s death, you can file a joint return. For the two following years, you can use the Qualifying Widow/Widower with Dependent Child filing status if you have a dependent. After two years, your filing status would be Single or Head of Household.”
Evidently, this status only helps a surviving widow or widower if she/he has a dependent child.
Nothing wrong with a simple life. 🙂
I haven’t checked yet for 2011, but ever since we paid off our house a few years ago, we haven’t been able to come up with enough expenses to justify itemizing.
Though you have made it simple I will just let my accountant figure this stuff out. I dont really think I have much to deduct anyway and the way I figure it as long as I dont owe Uncle Sam im okay.
I am hoping that even though you let your accountant figure this stuff out, you will be better prepared if you understand these concepts. This being said, it seems to me that itemizing is getting more and more difficult for many of us.