Itemizing Tax Deductions - Should You or Shouldn't You?

Each year, taxpayers everywhere ask whether it's better to itemize their deductions or opt for the standard deduction. What's the difference and how does it affect your bottom line?

Some taxpayers must itemize, even if their deductions are less than the standard deduction. Those taxpayers include nonresident aliens, dual-status aliens, and individuals who file returns for periods of less than 12 months. Additionally, when a married couple files separate returns and one spouse itemizes deductions, the other spouse must itemize as well.

In general, itemizing your deductions saves you more tax dollars only if the deductions exceed the standard deduction. For 2007, the standard deduction for single filers is $5,350 and $10,700 for those filing jointly. For married taxpayers who file a joint return, the standard deduction will remain twice that of single filers through 2010.

Itemized deductions are certain expenses that you can use to lower total income, and thus, your taxes. The categories include:

• Medical and dental expenses;

• State and local income taxes, or sales tax;

• Real estate and personal property taxes;

• Home mortgage and investment interest;

• Charitable contributions;

• Casualty and theft losses;

• Gambling losses;

• Job expenses; and

• Miscellaneous deductions.

Some itemized deductions, including medical expenses or miscellaneous deductions such as investment expenses, safe deposit fees, professional education, employee job-hunting expenses, and tax-preparation fees, are not allowed until they exceed a certain "floor" amount. For this reason, grouping expenses so you can itemize certain years often helps.

The highest floor to exceed is for medical expenses. Your medical expenses are not allowed as itemized deductions unless they exceed 7.5 percent of your adjusted gross income (AGI). That means if you have an AGI of $100,000, the first $7,500 of your medical expenses won't count.

Miscellaneous itemized expenses are also deductible only after they exceed 2 percent of your AGI. So, with an AGI of $100,000, your first $2,000 of miscellaneous itemized deductions won't count.

If your itemized deductions do not exceed these floor amounts, there are a few things you can do to maximize your tax savings. You can elect to accelerate or defer the payment of certain expenses such as property taxes, certain medical expenses, charitable contributions, or interest payments. For example, the cost of elective medical procedures can be deferred until a later year. If you lack the cash for the cost, you can charge the expense on your credit card and pay the next month. The cost is deductible in the year it is charged, not when the payment is made.

With the standard deduction rising each year, careful planning is required to determine if bundling deductions will work for you. Then the standard deduction can be used every other year, maximizing your tax savings.

This article is brought to you by Peter Tuttle, CPA.  You may contact me by sending an e-mail via the link to the right of my active rain blog page.  Please visit my website at http://www.petertuttlecpa.com/

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