| One important decision that the individual taxpayer has to make when preparing his or her federal income tax return is whether to itemize deductions or to take a standard deduction. The correct choice between separately listing and adding together individual items that are deductible under the Internal Revenue Code and taking a flat statutory amount to reduce the amount of income on which you are taxed can legally reduce a taxpayer's liability.
Advantages to Taking the Standard Deduction
One of the most obvious advantages to deciding to take the standardized deduction is the ease in preparing the tax return and in keeping records. The taxpayer who takes the standard deduction is not required to maintain records on deductible items such as medical expenses, business expenses, casualty losses, state and local taxes, mortgage interest, and charitable contributions.
Standard deductions are based on an individual's filing status. The elderly and the blind are allowed a higher standard deduction, while only a limited deduction is permitted for an individual for whom a dependency exemption is being taken on someone else's tax return.
Not every one is entitled to take a standard deduction. If a married couple is filing separate returns and one spouse itemizes deductions, the other spouse must also itemize his or her deductions. If an individual has a short tax year or is a non-resident or a dual status alien, the standard deduction is not available.
Advantages to Itemizing Deductions
If the total amount of allowable deductions exceeds the standard deduction based on an individual's filing status, he or she would reduce the total tax liability by taking the time and effort to itemized deductions.
Events during the year resulting in large uninsured medical expenses, interest and taxes paid on a home, large unreimbursed employee business expenses, large uninsured casualty or theft losses, large contributions to qualified charities, or large amounts of miscellaneous deduction may make it financially beneficial to itemize deductions. Also, anyone who is not entitled to take a standard deduction would reduce his taxes by itemizing deductions.
So How Do You Know Which to Choose?
The only way for a taxpayer to figure out whether to itemize or to take a standard deduction is to actually prepare the tax returns both ways and to compare the bottom line. Various computerized tax software packages make this comparison much less burdensome than it used to be, and they even prompt you to list deductions you might otherwise have forgotten to include.
In making the choice, an individual should also take into consideration the impact of the choice on his state income tax returns. Some states will only allow a taxpayer to itemize deductions on the state return if they have been itemized for federal purposes. Therefore, in certain situations, a decreased federal tax liability resulting from taking the standard deduction may increase the state tax liability by a higher amount. Once again, preparing the returns both ways is the only way to know for sure which method saves the most money in total taxes. Copyright 2010 LexisNexis, a division of Reed Elsevier Inc. |