Does It Make Sense to Itemize?

By Marcia Richards Suelzer, Toolkit Staff Writer

Most taxpayers can choose whether to claim the standard deduction or to itemize their deductions. There is no doubt that claiming the standard deduction is the easiest choice. Not only is the computation simpler, but there is no need to troll through your records to provide the necessary documentation and no worries about raising audit flags within the IRS. However, the simplest choice is not always the most sensible. Ultimately, you will want to make the choice that will save you the most money on your tax bill.

Whether to itemize deductions on your tax return depends on how much you spent on certain expenses last year. The following are the most common itemized expenses:

• Qualifying medical care. Amounts you paid for unreimbursed medical expenses, automobile and lodging expenses in obtaining medical care, and the costs of certain insurance premiums can count toward the medical expense deduction. However, you can only deduct the amount that is over 7.5 percent of your adjusted gross income (Form 1040, line 38).

Example. Rebecca had $3,000 of qualified medical expenses in 2011. Her adjusted gross income was $50,000. She cannot claim a deduction for any of the medical expenses because 7.5 percent of $50,000 is $3,750, which is more than her expenses.

• Mortgage interest. Generally, if you have a mortgage, you will be better off itemizing your deductions than claiming the standard deduction.
• Taxes. In order to deduct amounts paid for taxes, the tax must be imposed upon you, or on your property, and you must have paid it during the year. (Bear in mind that certain types of taxes, such as federal income tax, are not deductible.) You have the option of deducting either state/local income taxes or state/local general sales tax. You should do the calculation both ways and then select the one the gives you the largest deduction.
• Charitable contributions. Most deductions to qualified tax-exempt organizations are deductible. However, you must have the appropriate documentation, which varies depending upon the type and value of the donation.
• Casualty losses. You may be able to deduct unreimbursed losses to your nonbusiness property provided the losses were caused by a sudden, unexpected casualty or a theft. Even if the losses pass that test, you must reduce the amount of each loss by $100 and the total of your claimed deduction by 10 percent of your adjusted gross income (AGI).

Example. In 2011, Sandy, whose AGI was $80,000, had an unreimbursed casualty loss of $12,000 to property he did not use in his business. In oder to determine how much he can deduct, he must first reduce the amount by $100 and then reduce that amount by $8,000 (which is 10 percent of his AGI.) As a result, Sandy can only deduct $3,900 of his $12,000 loss.

• Miscellaneous deductions. Miscellaneous deductions come in two flavors: Those subject to a 2-percent adjusted gross income limitation and those that are not subject to this limitation. Generally, expenses that are more likely to be inflated and are more likely to be a significant amount are subject to the limit. Examples include: unreimbursed employee expenses, tax preparation fees, job search expenses, and expenses related to investment income. Examples of expenses not subject to the 2-percent limitation are casualty losses on income-producing property or from Ponzi-type schemes.

Know Your Standard Deduction Amount

Your standard deduction is based on your filing status and is subject to inflation adjustments each year. For 2011, the amounts are as follows:

Those amounts do not apply to you if you are 65 or older or blind or if another taxpayer can claim an exemption for you. The additional standard deduction for the blind and senior citizens remains at $1,150 for married individuals and $1,450 for singles and heads of household. The standard deduction for dependents (those who may be claimed on another person's tax return, but who file their own return) is limited to the greater of (1) $950, or (2) the person's earned income plus $300.

Making the Choice

If the total amount of your itemized deductions is more than your standard deduction, you can usually benefit by itemizing.

Warning. While most taxpayers can elect whether to itemize or claim the standard deduction, some taxpayers are not eligible for the standard deduction. They must itemize--even if they have few, if any, deductible expenses. For example, when a married couple files separate returns and one spouse itemizes deductions, the other spouse cannot claim the standard deduction and therefore must itemize to claim their allowable deductions. Other taxpayers who can't claim the standard dedution are nonresident aliens, dual-status aliens and individuals who file returns for periods of less than 12 months due to a change in accounting periods.