Should You Take the Standard or Itemized Deduction?
When doing your 2010 tax return are you taking the standard deduction (That’s $5,700 if single or filing separately, $8,400 if head of household, or $11,400 if married filing joint) or itemizing?
Don’t assume because these numbers seem so high that you may not exceed them. Better to take the time to review the things you can deduct and start the old adding machine. Let’s go through the items you may be able to take on your Schedule A:
- Mortgage points - Points are considered prepaid interest as their purpose is to buy down the rate charged on your loan. You can deduct these in full on the purchase of a home if the mortgage is a million dollars or less. If greater than a million, it must be scaled back as will the interest deducted. Note: Points paid for a refinance are not deducted all at once but are taken over the term of the loan, a fraction each year.
- Mortgage interest - Interest on your mortgage is deductible up to the first million dollars of debt owed. Further, interest on up to $100,000 of a Home Equity Liner of Credit (HELOC) is also deductible.
- Property tax - The real estate tax you pay on your home, car, and boat are all deductible.
- For those who live in a co-op, a building in which you own your apartment, but there’s a common area and perhaps, an underlying mortgage, the association should give you a statement each year documenting how much of your monthly fee was for property tax and mortgage interest. Don’t miss these.
- Investment interest - Is deductible limited to your net investment income.
- Student loan interest - is not subject to itemizing, you may take this deduction right on form 1040.
- State income taxes/State sales tax - you may deduct one or the other, which ever is greater for you. If you are in a state with a low income tax, it may be easy for your sales tax to be higher than your local income tax especially in a year when you are furnishing a home or buying a new car.
- Charitable contributions - Cash contributions are the simplest to document. You cut a check or charge the donation, and the charity acknowledges it in writing. If you benefit in any way (book, CD, T-Shirt, tote bag, etc) the charity should tell you the value of the item and it comes off the amount you may deduct. If you donate non-cash property valued over $500, you must fill out a form 8283 to document the donation. If you have long term stock gains, those shares are a candidate for donation. You get to deduct the value on the day the donation is made, and avoid the capital gain on the profit if you were to sell.
- Medical and dental expenses - You can deduct medical and dental expenses as part of your itemized deductions, but only the amount that exceeds 7.5% of your adjusted gross income. Doctors include chiropractors, psychiatrists, psychologists, as well as the traditional MDs and surgeons. Prescription drugs, weight loss programs prescribed by a doctor, and items such as false teeth, eye glasses, and contact lenses are included. Note that you can only deduct the cost of expenses for which you weren’t reimbursed.
- Casualty losses - I discussed this at length last year with all the flooding in the news. You are allowed to take a deduction for losses due to flood, fire, or theft, subject to a $100 deduction, and then only to the extend it exceeds 10% of your adjusted gross income.
- Business expenses - There are a number of items that fall into this category. Use of your home – you must maintain an area exclusive to your business and nothing else. It must be your principal place of business (i.e. your employer, if any, does not have a office for your use. The home office can’t just be for your convenience.) Form 8829 is used to determine the deduction you are allowed. Similarly, the use of your car for business purposes may be deducted. If the car is not used exclusively for business you must keep a contemporaneous accounting of your business miles and deduct only the business portion. If you are reimbursed by your employer for the business use, you don’t report the reimbursement, nor do you take a deduction. Costs incurred while traveling on business are deductible. These include Cost of airfare, meals, lodging, tips, dry cleaning, laundry, and cost of calls made. These expenses are all reported on for 2106 which calculates the amount that flows on to the schedule A.
A long list, I know, but whatever tax bracket you are in, the taxes you save by itemizing can add up fast. If this article helped you uncover some hidden deductions, please let me know by commenting below.