Standard deduction or itemized, which is best? 

Should I take the standard deduction or should I itemize?

First let’s define both terms.

The standard deduction, as defined under United States tax law, is a dollar amount that non-itemizers may subtract from their income and is based upon filing status.

The 2012 standard deduction for married couples filing jointly is $11,900, for singles and married individuals filing separately the amount is $5,950, and $8,700 for heads of household.

Additional amounts are available for persons who are blind and/or are at least 65 years of age.

An itemized deduction is an eligible expense that individual taxpayers can report on their federal income tax returns in order to decrease their taxable income.

Some examples of these include but are not limited to:

Medical expenses, to the extent that the expenses exceed 7.5% of the taxpayer’s AGI. (e.g., a taxpayer with an AGI of $20,000 and medical expenses of $5,000 would be eligible to deduct $3,500 of their medical expenses [20,000 X .075 = 1500; 5000 – 1500 = 3500].)

The 7.5% floor means that most taxpayers are unable to take advantage of the medical expense deduction.

Allowable medical expenses include:

• Payments to doctors, dentists, surgeons, chiropractors, psychologists, counselors, physical therapists, osteopaths, podiatrists, home health care nurses, cost of care for chronic cognitive impairment

• Premiums for medical insurance (but not if paid by another, or with pre-tax money)

• Premiums for qualifying long-term-care insurance, depending on the taxpayer’s age

• Payments for prescription drugs and insulin

• Payments for devices needed to treat or compensate for a medical condition (crutches, wheelchairs, prescription eyeglasses, hearing aids)

• Mileage for travel to and from doctors and medical treatment (@ 23¢/mile)

• Necessary travel expenses

• Capital expenditures that are advised by a physician, where the facility is used primarily by the patient alone and the expense is reasonable (e.g. a swimming pool for someone with degenerative spinal disorder, an elevator for someone with heart disease)

Non-deductible medical expenses include:

• Over-the-counter medications

• Health club memberships (to improve general health & fitness)

• Cosmetic surgery (except to restore normal appearance after an injury or to treat a genetic deformity)

State and local taxes paid, including:

• Income taxes OR Sales Taxes

• Property taxes (assessed by reference to the value of the property) but not including use taxes, excise taxes, fines or penalties

• Mortgage interest expense on debt incurred in connection with up to two homes, subject to limits (up to $1,000,000 in purchase debt, or $100,000 in home equity loans)

Also, points paid to discount the interest rate on up to two homes; points paid upon acquisition are immediately deductible, but points paid on a refinance must be amortized (deducted in equal parts over the lifetime of the loan)

• Investment interest, up to the amount of income reported from investments (the balance is deferred until more investment income is declared)

Charitable contributions to allowable recipients. This deduction is limited to either 30% or 50% of AGI, depending on the characterization of the recipient.

Donations can be made as money, or in the form of goods. The value of donated services cannot be deducted as a contribution.

Reasonable expenses necessary to provide donated services can be deducted (such as mileage, special uniforms, or meals.)

Eligible recipients for charitable contributions include:

• Churches, synagogues, mosques, other houses of worship

• Federal, state, or local government entities

• Fraternal or veterans’ organizations

Gambling losses up to the amount of declared winnings. The majority of taxpayers are eligible to take either the standard or itemized deduction (whichever is higher) but not both.

Figuring the itemized deduction takes a little more work. In most cases, if the taxpayer is not paying mortgage interest and property taxes the standard deduction will be the higher of the two.

If you find the itemized deduction is the higher of the two you will need to add Schedule A to your 1040 return.

For more information on deductions go to IRS Publication 501 at: http://www.irs.gov/pub/irs-pdf/p501.pdf.

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Questions for Deborah Ritz can be e-mailed to WeeklyADK@yahoo.com