What Expenses Can be Itemized?

Itemizing expenses means you get to sort through a number of different categories and tally them up to come up with your total deduction number. Not everyone will have expenses in each category, but the most common expenses include:

• Mortgage interest.
• Charitable contributions.
• Property taxes.
• State and local income taxes.
• Medical expenses that exceed 7.5% of your adjusted gross income.
• Various miscellaneous expenses that exceed 2% of your income such as: union dues, tools and supplies needed for work, tax preparation fees, some legal fees, and many more.

Should You Itemize?

There’s no right or wrong answer and it really depends on your personal situation. To see if itemizing is beneficial you will have to crunch a few numbers, or if you utilize tax preparation software such as TurboTax it will let you know which method will save you the most money.

Generally speaking, if you had a year with a significant amount of out-of-pocket medical expenses, made large charitable contributions, had a casualty loss, or own a home with a sizeable mortgage and therefore interest payment, chances are you’ll want to look at itemizing.

One thing to note is there are some limits on itemizing deductions.  The amount of itemized deductions and personal exemptions you can take are normally phased out as your income rises. In 2010, however, those income limits have been repealed, and the recent tax relief act extends the repeal for two more years, through 2012.

2010 Standard Tax Deduction

• Married, Filing Jointly    $11,400
• Single   $5,700
• Married, Filing Separately          $5,700
• Head of Household       $8,400
• Blind or over 65 and married – add:        $1,100
• Blind or over 65 and single/head of household – add:     $1,400

Using the above numbers you can see where you need to be when itemizing to make that the more attractive option. As you can see, it isn’t all that difficult to go over the standard tax deduction amount if you are a relatively new homeowner. Even if just $800 of each mortgage payment goes towards mortgage interest you’re up to a $9,600 deduction, and if your annual property taxes are around $2,000 you’re already at $11,600, which is just above the standard tax deduction. That doesn’t even take into account any other itemized tax deductions you may have.

It pays to compare the two tax deduction methods as it could mean leaving money on the table. So, take a look at the expenses that might qualify and see if you’re missing out on any money.

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.

It sounds simple, but having the right tax filing status is very important. Your tax filing status is a factor in the standard tax deduction you can take and your tax rate. On your 1040, 1040A, or 1040EZ, you will make your tax filing status selection on line 5.

Tax Filing Status

What are the five options tax filing status?

Right now the IRS recognizes 5 options for tax filing status.

• Single
• Head of Household
• Married Filing Jointly
• Married Filing Separately
• Qualifying Widow(er) with Dependent Child

I’ll describe them more in a bit. If you somehow qualify for more than one status, consider filing with the status that can give you the lowest tax rate. For example, if your status is married filing jointly or qualifying widow(er) with dependent child, you generally have the lowest tax rate.

What is the standard tax deductions you can take?

The IRS adjusts the amount due to factors such as inflation. For 2009, the standard tax deductions are:

• Single: $5,700
• Married (Filing Separately): $5,700
• Head of Household: $8,350
• Married (Filing Jointly): $11,400
• Qualifying Widow(er) with Dependent Child: $11,400

Note: If you’re 65 or older and/or you are blind (as determined by a eye doctor), you may be entitled to a higher standard deduction.

As you can see with the different statuses, you can significantly lower the amount of your income that is taxed by choosing a filing status that fits your circumstances.

What are the qualifications for each tax filing status?

Single

On December 31 of the tax year you filing for, you’re considered single by the IRS if you:

• were never married
• were legally separated or divorced
• widowed before January 1 and did not remarry during the tax year

Depending on your personal circumstances, you may be able to get a lower tax if you fall under widow(er) with dependent child or head of household.

Qualifying Widow(er) with Dependent Child

You’re considered a qualifying widow(er) if you, as of December 31 of the tax year:

• were widowed before January 1 of the tax year
• have a child/stepchild that you care for all year and can claim an exemption (there are some exceptions)
• have have kept the home, paying more than half the cost (ex. rent/mortgage, utilities, food, etc)

Note: You could file as married filed jointly if your spouse died during the tax year. After that you can file the next two years as a qualifying widow(er). According to the IRS, you can file with a Form 1040 or Form 1040A.

Married (Filing Separately)

You can be married filing separately if, as of December 31 of the tax year, you:

• are married
• can provide spouse’s name and social security number on the tax return

This may be an option if you only want to be responsible for your individual tax liability or if you spouse won’t agree to filing a joint tax return.

With this status you only have to report your income. If your spouses itemizes their deductions, you must as well, even if it is lower than the standard deduction.

Note: You can not claim earned income credit with married filing separately. According to the IRS, you can file with a Form 1040 or Form 1040A. In some cases, you may want to file as head of household, provided you meet the qualifications.

Married (Filing Jointly)

You can be married filing jointly if you, as of December 31:

• are married
• include your own and your spouse’s income
• both sign the tax tax return

Even if you have only one income, you can still file a joint return. Please know that both spouses are responsible for taxes due.

Head of Household

You can be considered head of household if you on December 31 of the tax year if you:

• are unmarried or consider unmarried, such as spending last 6 months apart from your spouse
• have have kept the home, paying more than half the cost (ex. rent/mortgage, utilities, food, etc)
• had a qualifying person living with you for more than half the year

The IRS has very specific guidelines on who is considered a qualifying person for tax purposes. You can get an earned income credit with the status.

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As you can see there are factors you need consider when choosing your filing status. Make sure you choose a status that is applicable and advantageous to you and your family.

Please be aware, I’ve done my best to ensure that the above listed amounts are current for tax year 2009, but you should always double-check to make sure that you’re working with valid information.