Every year you’re faced with one important tax question: should you itemize or just use the standard tax deduction? For some people this is an easy question, but for others who may be thinking about the difference for the first time, it can be a little confusing and intimidating. Obviously, the standard tax deduction is easier because it’s simply a fixed number set each year and you just have to write it down on your Form 1040. But if you think you may have tax deductions that go above and beyond the standard deduction it may make sense to itemize, even though it will require better record keeping and a little more work.
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 In 2010, however, those income limits have been repealed, and the recent tax relief act extends the repeal for two more years, through 2012.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.