A key decision taxpayers face when filing is whether to take the standard deduction or to itemize on their tax returns. Here are some answers:
The standard deduction is a flat amount established by the IRS that you deduct from your adjusted gross income. When you itemize, you deduct your actual qualified deductions.
The best method depends on how much you spend for allowable deductible expenses, including mortgage interest, property taxes, charitable contributions, and medical and dental costs. According to the Pennsylvania Institute of Certified Public Accountants, when your actual qualified deductions exceed the standard deduction, itemizing lowers your tax bill.
For 2006, the standard deduction is $5,150 for single filers and $10,300 for married taxpayers filing jointly and for qualified widows and widowers. For taxpayers who file as head of household, the standard deduction is $7,550. Married taxpayers filing separately are eligible for a standard deduction of $5,150. The standard deduction is higher for taxpayers age 65 or older and/or blind.
Itemizing your deductions is exactly what it sounds like. Using "Schedule A, Itemized Deductions," go through each category and list all your allowable expenses. There are six main categories of itemized deductions.
· Home mortgage interest on up to $1 million in home acquisition debt and up to $100,000 in home equity loan debt. You may also deduct points paid to obtain a home mortgage for the purchase or improvement of a principal residence.
· Taxes, including real estate property taxes and state and local income taxes. Charitable contributions, including contributions of cash and property, to qualified organizations.
· Medical and dental expenses that exceed 7.5 percent of your adjusted gross income.
· Miscellaneous expenses, including unreimbursed employee business expenses, certain investment expenses and costs you incur while job hunting.
· Only those miscellaneous expenses that exceed 2 percent of your adjusted gross income may be deducted.
· Casualty and theft losses that are more than 10 percent of your adjusted gross income.
If the total of all your itemized deductions exceeds the standard deduction, you should itemize. Remember, the higher your itemized deductions, the lower your taxable income and the smaller your tax bill.
Under current law, the deduction for itemized expenses is phased out when your adjusted gross income exceeds certain levels. Beginning with the 2006 tax year, this phase-out is gradually repealed. Taxpayers will compute their 2006 phase-outs as usual, but may reduce any required reduction by one-third.
Under tax law, some taxpayers must itemize, even if the standard deduction would be more favorable. For example, if you and your spouse file as married filing separately, both must either itemize or claim the standard deduction.
If one spouse itemizes, the other spouse must also itemize, even if he or she would get a larger deduction by claiming the standard deduction.
You must itemize if you are a nonresident alien, a dual-status alien, or if you are filing a tax return for less than a full year because of a change in your accounting period. Also, when a married couple chooses to file separate returns, both spouses must take the standard deduction or both must itemize.
If you're still unsure as to whether or not you should itemize,consult with a CPA. To find one in your area, visit: www.IneedaCPA.org .