When it comes to tax deductions on your tax return, you have two options. The first option is to take the standard tax deduction, which will be based on your tax filing status. For the 2009 tax year, the standard tax deduction starts at $5,700 for single filers and $11,400 for married filing jointly filers.
The second option is to itemize your tax deductions such as mortgage interest, property taxes, charitable tax donations, state and local income taxes, and medical expenses (if they exceed 7.5% of your adjusted gross income). The categories I’ve just listed are the larger and more common of the expenses you might be able to deduct from your expenses.
The simplest way, to be honest, is to let your tax preparation software do it for you. All tax preparation packages will walk through all of your deductions and do the math for you, the decision of whether or not to itemize is a common one year in and year out.
Calculate Your Itemized Deduction
As a general rule of thumb, and there certainly many exceptions, if you don’t have a home mortgage then taking the standard deduction is likely the better option. However, if you want to be 100% sure, you will need to get a copy of the Form 1040 Schedule A and fill it out.
Schedule A is a two-page form (the second page is a Worksheet for line 7, which covers new motor vehicle taxes) that covers itemized deductions and it lists every possible tax deduction. It’s separated into 7 sections:
1. Medical and Dental Expenses
2. Taxes You Paid
3. Interest You Paid
4. Gifts to Charity
5. Casualty and Theft Losses
6. Job Expenses and Certain Miscellaneous Deductions
7. Other Miscellaneous Deductions
Once you’ve filled out this form, compare your total deductions against the amount you would receive as a standard deduction. You will want to choose the option that gives you a greater reduction in your taxes.
What if they are close?
If your itemized deduction is very close to what you could get as a standard deduction, you may want to pick a standard deduction. If you claim a standard deduction, you may be eligible to fill out the much simpler 1040EZ form. Also, you would not need to maintain a record of your itemized deductions because you never claimed them.
In the end, you will want to make the decision that makes the most financial sense to you and puts more of your money back into your pocket.