Understanding standard versus itemized deductions
One of the questions many people ask themselves when preparing their income taxes is whether they should take a standard deduction or itemize their returns. The decision they make can have a big impact on their liability, so understanding the difference between the two and which works best with a person's particular situation is key to making the most advantageous choice.
A standard deduction relates to a fixed amount that is set by the Internal Revenue Service each year by which individuals can reduce their taxes. For the 2012 tax year, singles and married couples filing separate returns may deduct $5,950. Married couples filing jointly may take a standard deduction of $11,900, while those filing head of household status can deduct $8,700.
For itemized deductions, in contrast, there is no set figure that the IRS determines. Instead, taxpayers may add up all the deductions for which they are eligible. If this amount is higher than the standard deduction, it may make sense to fill out additional forms to itemize. Many write-offs must be itemized in order for individuals to claim them. If, on the other hand, the standard deduction is higher, it may not make sense to itemize, even if consumers may be eligible for certain write-offs.
Which deductions must be itemized?
Individuals who are facing certain financial circumstances may benefit greatly by itemizing. For example, the list of deductions that qualify for itemizing generally include medical expenses, mortgage interest, state and property taxes, charitable contributions, casualty and theft losses, unreimbursed employment expenses and job search costs. However, it's important for taxpayers to keep in mind that not every dollar spent can be subtracted from their income.
For example, those who are writing off medical expenses can only do so if the amount they spent during the tax year exceeds 7.5 percent of their adjusted gross income. This amount increases to 10 percent for the 2013 tax year. In order to claim miscellaneous expenses - including job expenses, investment fees and home office deductions - the amounts claimed must exceed 2 percent of the filer's AGI.
Lastly, a couple's filing status also affects whether they can take a standard or itemized deduction. Even though married partners may file separate returns, if one itemizes his or her deductions, the other spouse must do so as well. For more guidance on which route may work best with a person's unique circumstances, individuals may want to consult a licensed tax preparer to make the best decision.
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