Taxes Q & A- What Is the Difference Between

What Is the Difference Between a Standard Deduction and An Itemized Deduction?

Prior to filling out your tax forms, you need to decide if you will be applying the standard deduction or the itemized deduction. Choosing the one that offers the most financial benefit is, of course, best, and this choice will depend on your circumstances and expenses in any given tax year.

Standard Deduction

The standard deduction is a set dollar value that taxpayers subtract from their income, which gives them their adjusted gross taxable income. If you do not have many deductions to itemize, like charitable deductions, medical expenses, or work-related expenses, the standard deduction is usually best. Periodically, the set amount will go up or down, so check with the Internal Revenue’s Web site at www.irs.gov to ascertain the amount.

In addition, there might be other standard deductions set for individuals meeting certain criteria. For instance, a standard deduction might be in place for those individuals paying property taxes but not itemizing this deduction. However, these types of unusual or occasional deductions change from year to year, so be sure to keep on top of what is new in the tax law every year before filling out tax forms.

Certain taxpayers benefit most from the standard deduction:

-- Those who are 65 years or older

-- Those who are blind or are partly blind, with documentation from an ophthalmologist or registered optometrist

-- Those who pay state or local real estate taxes

-- Those who have suffered from a federally-declared disaster

If you qualify, the amount of your standard deduction depends on your income and age.

Itemized Deductions

Itemizing your deductions is financially advantageous if your total allowable deductions are higher than the standard deduction amount. Keeping track of expenses throughout the tax year is more work than simply taking the standard deduction, but the effort is usually worth it, to reduce your taxable income.

In addition, consider itemizing deductions if you are not allowed to use the standard deduction when the following conditions exist:

-- If you are married and filing a separate return, but your spouse itemizes his or her deductions

-- If you are filing a tax return for less than a full year because you changed your annual accounting period

-- If you are a non-resident or dual-status alien. A dual-status alien is someone who was both a non-resident and resident alien during the tax year.

Which Deduction Is Best for You?

To be sure which deduction is best for you, calculate the totals of your itemized deductions. Compare these final totals to the standard deduction amount. In some cases, the decision is clear, because the difference between the totals of any itemized deductions and the current amount of the standard deduction is significant, or because you have few allowable deductions. Other circumstances may factor into the decision, such as:

-- You do not qualify for the standard deduction, or the amount you can claim is limited

-- You have had large, uninsured medical and dental expenses

-- You paid interest and taxes on your home

-- You paid out of pocket for several employee business expenses not reimbursed by your --employer

-- You had a large uninsured casualty or theft loss

-- You made large contributions to qualified charities

If your total itemized deductions are more than the standard deduction, and you will itemize, then you will complete IRS Schedule A & B. In the event you decide to itemize your deductions, but after submitting the forms realize you should have taken the standard deduction, you have an option to rectify your situation by filing IRS Form 1040X.

Limitations

You may lose some percentage of the standard exemption if your income is over a certain amount. This same limitation is true if you itemize your deductions. Check with the IRS to verify the amount of income that will create this loss, because the ceiling cap changes. To learn more about standard deductions and itemizing refer to IRS Publication 501.

Additional Resources

-- Tax Topic 501 - Should I Itemize http://www.irs.gov/taxtopics/tc501.html

-- IRS Schedule A & B Instructions www.irs.gov/pub/irs-pdf/i1040sa

-- Topic 500 - Itemized Deductions http://www.irs.gov/taxtopics/tc500.html