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The Standard Deduction vs. Itemized Deductions

Ah, things were much simpler when you were young.  When it was time to file your income tax return as a single, working taxpayer, you probably either did it yourself or simply dropped it off at the local tax preparer’s office. Perhaps you even used the 1040EZ Form.

As you get older, along come the dependents, debt obligations, and other responsibilities. Your tax liability increases and suddenly filing a return has gotten a lot more complicated. But don’t despair! The federal government offers a number of tax benefits (with certain eligibility requirements) that can help ease your tax burden, including tax deductions.

Tax deductions lower your taxable income and they are calculated using the percentage of your marginal tax bracket. For example, if you are in the 25% tax bracket, a $1,000 deduction saves you $250 in tax (0.25 x $1,000 = $250). In general, a taxpayer must decide between using itemized deductions or a standard deduction. To aid in your decision, use the ‘Should I Itemize or Take the Standard Deduction?‘ Tax Calculator.

Your standard deduction amount is based on your filing status and it is subtracted from your AGI (adjusted gross income).  For tax year 2010, the standard deduction is as follows:

  • $5,700 for single filers
  • $5,700 for married couples filing separately
  • $11,400 for married couples filing jointly
  • $8,400 for head of household filers
  • $11,400 for qualifying widow(er)s

If you own a house, donate to a charity, or visit the doctor fairly often, it may make more sense for you to consider itemizing your deductions rather than taking the standard deduction. It is generally recommended that you itemize deductions if their total is greater than your standard deduction. Note that some itemized deductions are based on a minimum (or ‘floor) amount, meaning that you can only deduct amounts that exceed the specified ‘floor.’ To compare the standard deduction versus itemized deductions for your particular situation, it’s a good idea to use a tax calculator.

The ‘Should I Itemize or Take the Standard Deduction?’ tax calculator can help you determine which method is best for your situation. This tax calculator consists of 5 categories, each explained below.

Input and Assumptions

The first category in the tax calculator is Input and Assumptions. In this section you must enter your adjusted gross income (AGI), filing status, and the number of filers who are blind and/or over age 65 ? note that there is an additional standard deduction for the elderly and visually impaired.

Dental and Medical Expenses

The second category in the tax calculator is Dental and Medical Expenses, where you enter the total cost of your expenses for each. In general, you can deduct expenses that you paid during the year for medical or dental care for yourself, your spouse, and your dependents. Medical care expenses include doctor/dentist fees, prescription drugs, hospital and laboratory services, nursing or care facilities, and the cost of travel to appointments.

Taxes You Paid

The third category in the tax calculator is Taxes You Paid. In this section, enter the amount you paid towards state and local income taxes (from your paystub or W-2), real estate taxes (from your mortgage lender’s statement), property taxes (from your county tax bill or your mortgage company statement) and any other deductible taxes.

Interest (Paid/Received)

The fourth category in the tax calculator is Interest Paid/Received.  Enter the amount of home mortgage interest and any mortgage points you paid, which can be found on your mortgage lenders statement or loan origination document. Input the amount of investment interest and dividends you received, as well as any investment interest you paid, which can be found on your account statement or Form 1099 DIV/INT from your brokerage firm or bank.

Charitable Contributions

The last category on the tax calculator is Charitable Contributions. In this section you will provide the amount of cash donations you made (and make sure you have a receipt/record of the donation).  Enter the total amount of ‘in-kind’ contributions (the fair market value of goods/services donated) as well as any ‘carryover’ contributions from previous years. Note that you must fill out Form 8283 (Noncash Charitable Contributions) if your total deduction for all noncash contributions is greater than $500.

After you have completed all applicable fields in the tax calculator, click ‘Submit’ to determine whether your itemized deductions are higher than your standard deduction.

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