Standard Deduction or Itemized Deduction?

March 19, 2010

Who doesn’t love tax deductions right? As a quick reminder, a tax deduction is an expense that you subtract from your total income; after taking all your deductions you’re left with your adjusted gross income or AGI. The lower your AGI, the lower the amount of taxes you will have to pay.

When its time to file your tax returns you’ll have to decide between taking the standard deduction or to file itemized deductions. Which way you decide depends on a number of factors but you have to chose just one.

Some Deduction Rules

  • Eligibility: To be eligible for the standard deduction you must be a U.S. Citizen or resident alien, non resident aliens cannot use the standard deduction.
  • Filing Status: If you are married and filing separately you cannot mix and match, if one party itemizes, both parties must itemize or one must claim zero as the standard deduction.
  • You can decide to use the deduction method that results in the least amount tax owed.
  • Itemizers must use IRS Form 1040 and complete form Schedule A. If you claim the standard deductions you can use IRS Form 1040A or 1040EZ

Itemized Deductions

You should have documentation as evidence to support each item that you are attempting to deduct. If you cannot support your tax deduction claims then you risk running into IRS problems if they ever decide to do a tax audit.

In order to accurately itemize your tax deductions you should be saving receipts from all of your allowable itemized deductions for the year. Here are some of the types of expenses that can be used to calculate itemized deductions:

  • Medical expenses that are greater than 7.5% of the taxpayers adjusted gross income – medical tax deductions
  • State and local taxes including property, sales and income taxes
  • Some mortgage interest and home equity loan interest
  • Investment interest
  • Donations and charitable contributions

Standard Deduction

What exactly is the standard deduction? It’s a flat rate amount that is deducted from your total income to arrive at your AGI. The amount that can be deducted varies based on the your filing status. Here’s a standard deduction table from the last few years:

YearSingleMarried
Filing Jointly
Married
Filing Separately
Head of householdQualifying widow(er)
2009$5,700 $11,400 $5,700 $8,350 $11,400
2008$5,450 $10,900 $5,450 $8,000 $10,900
2007$5,350 $10,700 $5,350 $7,850 $10,700
2006$5,150 $10,300 $5,150 $7,550 $10,300

According to the IRS more taxpayers that file income tax returns choose the standard deduction amount over the itemized deduction amount. There are a few different reasons which might contribute to this:

  • If you don’t have many qualifying expenses, the inflation adjusted standard deduction may be a bigger tax savings for you.
  • Claiming the standard deduction means that you’re not burdened with knowing and with keeping track of every single qualifying expense throughout the year.
  • If the standard and itemized deduction amounts are similar some people may choose the standard deduction so they won’t worry about the possibility of problems during an IRS audit.

Track Your Expenses

If you haven’t kept records of all your itemization expenses for the past year you might get some tax forms that could help you, like the form for mortgage interest paid on a loan. However it’s better to track your expenses yourself throughout the year. The only way to know for sure which method works out best for you is to keep records of your itemizable expenses during the year and then calculate both methods next tax season.

Debbie

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Debbie

Debbie Dragon is a full-time writer who has been covering personal finance online for almost 9 years.


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