Itemizing is an incredibly easy concept to understand, but the strategies behind it can be complex and myriad. The rule for when to itemize is simple -- you do it if the total of your itemized deductions is greater than your standard deduction.
Your tax is based on your "taxable income." That's your total income after you've subtracted above-the-line deductions like your Individual Retirement Account or other qualified retirement-plan contributions, moving expenses or alimony payments, plus your personal exemption and either:
- Your standard deduction or
- Your itemized deductions.
Your itemized deductions are sometimes referred to as "below the line" deductions. (Your "adjusted gross income" is "the line.") Clearly, the more you can deduct, the less in tax you have to pay.
Here are the standard deductions that apply to your 2009 taxes:
| Filling status | Amount |
|---|---|
| Married filling jointly or qualifying widow(er) | $11,400 |
| Head of household | $8,350 |
| Singles | $5,700 |
| Married filling separately | $5,700 |
Here are the standard deductions that apply to your 2010 taxes:
| Filling status | Amount |
|---|---|
| Married filling jointly or qualifying widow(er) | $11,400 |
| Head of household | $8,400 |
| Singles | $5,700 |
| Married filling separately | $5,700 |
If you take the standard deduction, and pay property taxes on a principal residence, up to $500 ($1,000 on a joint return) can be added to your normal standard deduction amount. Congress claimed to pass this provision to stimulate the housing market. In fact, it benefits most those who have paid off their mortgages (and lost the interest deduction) but are still paying property taxes.
Some taxpayers must itemize, even if their deductions are less than the standard deduction. You must itemize your deductions if:
- You are married, filing separately, and your spouse itemizes.
- You are a U.S. citizen who can exclude income from U.S. possessions.
- You are a nonresident or dual-status alien.
- You file a short-period return because of a change in your accounting period.
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- Medical and dental expenses.
- Taxes. These include state and local income taxes, property taxes on real estate, intangible taxes (on the value of stocks and bonds you own) and on personal property taxes on such things as cars. In 2009, you can deduct either your state income taxes or your state sales taxes but NOT BOTH.
- Interest expenses. For most people, these are limited to home mortgage interest, points (interest that's prepaid to buy a home), and some interest on investments and education expenses. For most taxpayers, the mortgage deduction is what lets them itemize. If you take out a 30-year, $140,000 mortgage at 6%, you will generate about $8,350 in deductible interest in the first year.
- Charitable contributions.
- Casualty and theft losses.
The key, then, is to maximize the value of your itemized deductions. Here's where planning can put dollars in your pocket.
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Dealing with the floors
Some itemized deductions -- including medical expenses or miscellaneous deductions such as investment expenses, safe deposit fees, professional education, employee job-hunting expenses and tax-preparation fees -- are not allowed until they exceed a certain "floor" amount.The toughest floor to exceed is medical expenses. No medical expenses are allowed as itemized deductions except for the amount that exceeds 7.5% of your adjusted gross income. That means if you have an adjusted gross income of $100,000, the first $7,500 of your medical expenses doesn't count.
But sometimes, elective medical expenses can be accelerated or even deferred. Orthodontia payments for you or your dependents can often be extended. They always can be accelerated. These expenses are deducted in the year they are paid, not necessarily in the year the service is rendered.
Continued: Dealing with interest and tax payments
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