Most taxpayers have a choice of either taking a standard deduction or itemizing their deductions. If you have a choice, you should use the method that gives you the lower tax.
The standard deduction is a dollar amount that reduces the amount of income that you are taxed on. The amount of your standard deduction varies according to your filing status. In 2007, the standard deduction is $5,350 if you file a single return, and it’s double that amount ($10,700) if you claim the married filing jointly status. If you qualify for the head of household status, the standard deduction is $7,850 for 2007. Additionally, you qualify for a higher standard deduction if you’re blind or you’re 65 or older.
There are many good things about the standard deduction. First and foremost, it allows you a deduction against your taxable income whether or not you have any expenses that qualify under the rules for taking itemized deductions. In addition to saving you money on your tax bill, the standard deduction eliminates the need to itemize actual deductions, such as medical expenses, charitable donations, and taxes, on Schedule A of Form 1040. It also does away with the added burden of keeping records and receipts of your expenditures in case you’re audited by the IRS. For these reasons, about two out of every three tax returns filed with the IRS claim the standard deduction.
If you aren’t sure whether or not the standard deduction for your filing status will be larger than your allowable itemized deductions, just follow TaxCut’s Deductions interview by answering the questions and entering your expenses. TaxCut will do the calculation for you and advise you which deduction, standard or itemized, will be better for you to take.
Itemized deductions also reduce your taxable income. For example, if you’re in the 15% tax bracket, every $1,000 in itemized deductions knocks $150 off of your tax bill.
You may benefit from itemizing your deductions on Schedule A (Form 1040) if you:
Had large uninsured medical and dental expenses during the year.
Paid mortgage interest and real estate taxes on your home.
Had large unreimbursed expenses as an employee, or other miscellaneous expenses.
Had large uninsured casualty (fire, flood, wind) or theft losses.
Made large contributions to qualified charities.
Even if your itemized deductions are less than the amount of your standard deduction, you can elect to itemize deductions on your federal return rather than take the standard deduction. You may want to do this, for example, if the tax benefit of being able to itemize your deductions on your state tax return is greater than the tax benefit you lose on your federal return by not taking the standard deduction.
If you do itemize deductions on Schedule A of Form 1040, there is one situation that will affect your total deduction allowed. If your 2007 adjusted gross income (AGI) from line 38 of Form 1040 exceeds $156,400 ($78,200 if you’re married filing separately), then some of your itemized deductions will be limited. Once your AGI exceeds this threshold, your itemized deductions will be reduced. This reduction is being phased out, but it currently is about 2% of the amount that exceeds the threshold.
The good news is that your deductions for medical expenses, casualty and theft losses, gambling losses, and investment interest expense are not subject to this limitation. Moreover, no matter how high your AGI climbs, your other itemized deductions can’t be reduced by more than 80%. For more information on how your deductions are limited in this situation, see Publication 505, Tax Withholding and Estimated Tax.