MONEY MANAGEMENTFrom the Virginia Society of Certified Public Accountants - Presented by Dean Knepper, CPA, CFP®
STANDARD DEDUCTION OR ITEMIZING: WHICH IS RIGHT FOR YOU?
(February 1, 2007) -- As tax-filing time approaches, a key decision taxpayers face is whether to take the standard deduction or to itemize on their tax returns. 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 Virginia Society of CPAs, when your actual qualified deductions exceed the standard deduction, itemizing lowers your tax bill.
Standard deduction amounts for 2006
For 2006, the standard deduction is $5,150 for single filers and $10,300 for married taxpayers filing jointly and for qualified widower(s). For taxpayers who file as head of household, the standard deduction is $7,550, and 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 takes more effort
Itemizing your deductions is exactly what it sounds like. Using Schedule A, Itemized Deductions, go through each category, listing all your allowable expenses. There are six main categories of itemized deductions.
1. 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 you paid to obtain a home mortgage for the purchase or improvement of a principal residence.
2. Taxes, including real estate property taxes and state and local income taxes.
3. Charitable contributions, including contributions of cash and property to qualified organizations.
4. Medical and dental expenses that exceed 7.5 percent of your adjusted gross income.
5. 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.
6. Casualty and theft losses that are more than 10 percent of your adjusted gross income.
When 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.
New phase-out rules apply to 2006 tax returns
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.
Not all taxpayers have a choice
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.
Consult with a CPA
If you’re still unsure as to whether or not you should itemize, consult
with a CPA. He or she can help to determine the right strategy for you.
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
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