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Several factors should play into the decision of itemizing your deductions versus taking the standard deduction.
Generally, if your total deductions are greater than the standard, you should itemize your deductions.
Here are some tips to help you decide whether you should itemize taxes or not…
Let’s use the 2006 tax year as an example:
- The standard deduction for a single individual under the age of 65: $8,450.
- The standard deduction for a single individual over the age of 65: $9,700.
NOTE: The standard deduction differs depending on age, filing status, and dependents — be sure to check out the IRS website for the latest info.
Below is a list of several expenses that can be included as an itemized expense. Included in the list is the threshold that must be met in order to include the deduction.
Typically, there are 2 types of thresholds: ceilings and floors.
- A ceiling means the total expense you can deduct is subject to limitation. For example, charitable contributions can be only be deducted up to 50% of your adjusted gross income (AGI).
- A floor means that you must incur a certain amount of non-deductible expenses before you are able to deduct the rest of your expenses. For example, medical expenses can only be deducted after they reach 7.5% of your total AGI.
Following is a list of expenses that are itemized (type of threshold) and limitations:
- Medical Expenses (floor) Costs over 7.5% of your AGI
- Home Mortgage Interest (ceiling) Interest on up to $1,000,000 of principal debt
- Home equity interest (ceiling) Interest on up to $100,000 of principal debt
- Investment Interest (ceiling) Interest up to amount of net investment income
- Charitable Contributions (ceiling) Up to 50% of your AGI
- Charitable Contributions – long term property (ceiling) 30% of AGI
- Casualty and theft losses (floor) Costs over 10% of AGI
- Miscellaneous deductions (floor) Costs over 2% of AGI
Total of itemized deductions (ceiling) Total deductions are reduced by 3% of AGI in excess of $150,500.
If it is beneficial to itemize your deductions, it is done so on a Schedule A form (Form 1040).
Both deductions help reduce your tax liability. However, always choose the one that will reduce your tax liability the most and save you money!
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Very few people use the words fun and taxes together… and don’t worry, I’m not one of them. I hope to make taxes easier to understand and less of a hassle. I am a CPA with a Master’s in Accounting, and I’ll do my best to help explain many of the tax options available today.