Everyone who files taxes has to face the decision of whether to choose standard or itemized deductions. There are benefits to taking either route depending on how many tax deductions you are able to claim.
The key is to look at your personal financial situation to decide the best route for you. To help you figure it out, let’s explore what itemized deductions are exactly and whether to use them when filing your taxes.
What Does It Mean to Itemize?
When you file your taxes, your 1040 form asks you to either claim the standard deduction or itemize. Itemizing your deductions means that you add up individual expenditures or donations made in the tax year can later be deducted. The total is then subtracted from your adjusted gross income (AGI).
Some payments that qualify as itemized deductions include:
- Mortgage interest
- Property taxes
- Charitable contributions
- Medical expenses that exceed 7.5 percent of your AGI (including a new deduction for breastfeeding moms)
- State and local income taxes
Some other miscellaneous expenses that exceed 2 percent of your income could be itemized, including union dues, tax preparation fees, tools and supplies, legal fees, casualty and theft loss, un-reimbursed employment expenses and safe deposit box expenses.
The IRS offers a list of itemized deductions to determine what qualifies.
Is It Better to Use Itemized Deductions or the Standard Deduction?
Deciding between the standard deduction and itemized deductions is a matter of looking at your personal situation and determining which would offer better financial benefits.
For many taxpayers, the standard deduction is often the preferred choice because:
- It’s easier to claim: The standard deduction’s flat rate makes it easier to figure out how much to deduct from the AGI when calculating.
- Many don’t have enough to itemize: A lot of taxpayers simply do not have enough itemized deductions to add up to the standard deduction amount they would receive.
A way to help you decide which deduction route to take is to look at how each would affect your AGI.
For example, if your AGI is $45,675, after subtracting the standard deduction ($5,700 if single or married, filing separately, $8,400 if head of household and $11,400 if married, filing jointly in 2010), you could reduce your AGI to $39,975, $37,275 or 34,275 depending on your filing status.
If after reviewing this information and realizing that, based on your filing status, you could reduce your AGI (and ultimately, your taxable income) more by individually adding up your deductions than you could by taking the standard deduction, it may be best to consider itemized deductions.
To know for sure, you would need to fill out the IRS Schedule A form for the current tax year.
While itemized deductions are not chosen by the majority of taxpayers because most simply deduct more with the standard deduction, the IRS estimates 50 million taxpayers take this route. So now that you realize what itemized deductions are, it’s good to consider them as a way to save on your taxes this year.