Don't feel cheated if you claim the standard deduction. After all, it saves you the hassle of itemizing your deductions. And, besides saving you time, the standard deduction saves you money. The only reason to use it is if your qualifying expenses for the year are less than the standard deduction for your filing status. In other words, you're getting credit for more than you actually spent on deductible expenses. About two-thirds of all returns filed claim the standard deduction.
Over the years Congress has packed the tax law with goodies. Deductions are the lawmakers' invitations to you to let Uncle Sam pick up part of your expenses by reducing your tax bill. If you spend money for specifically sanctioned expenses, the IRS will ignore that part of your income. Every $1,000 of deductions knocks $1,000 off your taxable income, shaving $280 off your tax bill if you're in the 28% bracket. That effectively reduces your $1,000 out-of-pocket cost to $720.
A few years back, Congress decided that higher-income taxpayers shouldn't get credit for all their deductions. The squeeze was supposed to be temporary. But the lawmakers made it permanent. Then, as part of the big tax cut in 2001, the lawmakers had another change of heart and decided to phase out the crackdown. The phase-out begins in tax year 2006. The 2006 trigger points where your itemized deductions begin to be phased-out will be $150,500 on joint returns and $75,250 for married filing separately. (The trigger points will rise in the future with inflation.)
If your AGI punctures the level, the tax-saving power of itemized deductions is eroded. In past years you would lose deductions equal to 3% of the amount by which your AGI exceeds the threshold. For 2006, however, Congress has softened the blow. This year the amount by which your itemized deductions can be reduced is only 2/3rds of the amount that would otherwise apply. While we can't help you with the law, TaxCut will handle the necessary calculations automatically.
This take-away does not hit all deductions. It spares write-offs for medical expenses, casualty and theft losses, gambling losses and investment interest. You get the full power of those deductions, notwithstanding your AGI. (Medical expenses and casualty and theft losses are already subject to tough restrictions.) And, regardless of how high your AGI goes, no more than 80% of your other itemized deductions can be taken away by this rule.
See Schedule A to read more about itemized deductions.