CARL WATTS & ASSOCIATES

February 14th, 2011

www.carlwatts.com
office@carlwatts.com
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Standard deductions or itemized deductions?
If you are among taxpayers who have a choice, then you should obviously use the method that gives you the lowest tax.

If the money you paid for medical care, mortgage interest, taxes, charitable contributions, casualty losses and miscellaneous deductions is more than your standard deduction, you can benefit by itemizing.

The standard deductions for 2010 are: $5,700 for singles, $11,400 if married filing jointly, and $8,300 for head of household.

You cannot use the standard deduction if:

  • You are married and filing a separate return, and your spouse itemizes deductions;
  • You are a nonresident alien or a dual-status alien during the year; or
You are filing a tax return for a period of less than 12 months because of a change in your annual accounting method.

Standard deductions are not an option for estate or trust funds and partnerships as well.


What items are included on Schedule A?

To itemize your deductions you need to use Form 1040 Schedule A, which practically walks you through the whole itemizing process.

Medical and dental expenses may be deducted only for the amount which exceeds 7.5% of your AGI (adjusted gross income).

You may include in your medical expenses: insurance premiums paid for medical care or qualified long-term care insurance, fees paid to doctors and dentists, hospital services, treatments, drugs that require a prescription (except for insulin), false teeth, eyeglasses, hearing aids, transportation costs and so on. You can find extensive lists of deductible medical expenses online.

Your total medical expenses for the year must be reduced by any reimbursements you received personally or that was paid directly to the doctor or hospital.

Deductible taxes are mostly state and local taxes on income, real estate and personal property, but also foreign income and real estate taxes and qualified motor vehicle taxes.

Qualified residence interest and points (generally reported to you on Form 1098) include interest you pay for a loan secured with your main home or a second home.

You may also deduct investment interest (limited to your net investment income) but you cannot deduct personal interest (like interest paid on a loan to purchase a car or credit card or installment interest incurred for personal expenses).

Student loan interest is deducted separately, not on Schedule A.

You may also deduct charitable contributions made to qualified organizations.

We dedicated an entire newsletter to charitable contributions, so please use the link for details.

Casualty and theft losses may also be deducted to the extent that they exceed 10% of your AGI and $100 ($500 in 2009) per event.

You may deduct gambling losses to the extent of your gambling income.
Itemized Deductions
A wide range of miscellaneous expenses are also deductible on Schedule A, but only to the extent that they exceed 2% of your AGI. Because of this 2% floor, it is important to distinguish miscellaneous itemized deductions from other itemized deductions.

Miscellaneous itemized deductions may include:

  • Job-related expenses, like tools, equipment, uniforms;
  • Unreimbursed work-related expenses, such as travel, education, or business use of your car;
  • Expenses related to the business use of home, if part of your home is used regularly and exclusively as your principal place of business, where you meet and deal with patients, clients, customers in connection with your trade or business;
  • Unreimbursed business entertainment and gifts expenses, of which generally only 50% is allowed as a deduction;
Union dues;
Subscriptions to newspapers or other periodicals directly related to your job;
Fees you paid to tax preparers, or to purchase books and/or software used to calculate and prepare your taxes;
Safe deposit box fees and investment fees.


If your AGI happens to be above a certain threshold (or applicable amount), then your total allowable itemized deductions will be reduced by 1/3 of the lesser of:

  • 3% of the excess of AGI over $166.800 for couples and $83,400 for singles; or
  • 80% of the total itemized deductions otherwise available.

Itemized deductions which are subject to the limitation are: taxes, interest, charitable donations, job-related expenses and some miscellaneous deductions.

The limitation of itemized deductions is being “phased out” , meaning the total deduction is itself subject to a deduction. For years 2008 and 2009 the amount was reduced to 1/3 of the limitation.

NEW: For year 2010 taxpayers with AGI above a certain amount will no longer lose part of their itemized deductions.
If you decide to itemize your deductions please make sure you keep all records required to substantiate your deductions.

If the amounts of your itemized deductions and the standard deduction don’t differ much, it might be better to chose the standard deduction to reduce the possibility of adjustment by the IRS and to keep your tax return less complicated.