Standard Vs Itemized Deductions: Picking a Side
As enrolled agents and CPAs well know, as does any registered tax agent schooled by tax CPE, tax continuing education courses for tax professionals, all taxpayers are faced with the choice of taking the standard deduction or itemizing their deductions when filing the federal income tax return.
Below are six facts that will help tax professionals determine the method that will give clients the lowest tax.
Whether to itemize deductions on the tax return depends on how much a taxpayer has spent on certain expenses last year. Money paid for medical care, mortgage interest, taxes, charitable contributions, casualty losses and miscellaneous deductions can reduce a taxpayer’s taxes substantially. If the aggregate amount spent on these items exceeds the SD, the general rule of thumb is that a client will typically benefit the most by itemizing.
Standard deduction amounts are based on a taxpayer’s filing status and are impacted by yearly inflation adjustments.
For 2010, the standard deduction amounts are as follows:
Married Filing Jointly: $11,400
Head of Household: $8,400
Married Filing Separately: $5,700
Qualifying Widow/Widower: $11,400
Different standard deductions for Different Taxpayers
The standard deduction amounts are contingent upon a number of variables including an individual’s:
age (whether they’re 65 or older);
ability to see (e.g, they’re blind);
If any of these conditions apply, then the Standard Deduction Worksheet-on the back of Form 1040EZ, or in the 1040A or 1040 instructions-should be used.
The standard deduction amount also depends on whether a taxpayer intends to claim the additional SD for the following:
a loss from a disaster declared a federal disaster
state or local sales or excise tax paid in 2010 on a new vehicle purchased before 2010
To claim these additional amounts, a Schedule L must be filed.
Limited itemized deductions
A taxpayer’s itemized deductions are no longer limited because of adjusted gross income.
Married Filing Separately
If a married couple files separate returns and one spouse itemizes deductions, the other spouse is prohibited from claiming the SD and is required to itemize all allowable deductions.
Not all taxpayers are eligible for the standard deduction
Individuals deemed ineligible by the IRS include:
individuals filing returns for periods of less than 12 months due to a change in accounting periods
The standard deduction can be taken on the following forms:
If a taxpayer qualifies for the higher SD for new motor vehicle taxes or a net disaster loss, they are required to attach Schedule L. To itemize these deductions, use Form 1040, U.S. Individual Income Tax Return, and Schedule A, Itemized Deductions.
Given all of the factors that play into whether a taxpayer should opt for the SD or to itemize, enrolled agents, CPAs and other registered tax agents should strongly advise them to reach out to tax professional for guidance.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.