March 27, 2014

If you have always prepared your own federal income tax returns, you may have accepted the standard deduction by default. In some cases, it is worthwhile to go through the hassle of gathering receipts and completing the somewhat more involved process of claiming itemized deductions. In other cases, the IRS will not allow you to take the standard deduction. While each individual tax case is unique, there are a few general guidelines to help you decide if you should itemize your tax deductions for this year’s federal income tax returns.

The Standard Deduction, Not Personal Exemptions

Many taxpayers confuse the standard deduction with personal exemptions. The IRS allows one personal exemptions for each person in a household. If you are a single taxpayer with no children, you are entitled to one personal exemption. But if you are a single parent with two dependent children, you are entitled to your personal exemption plus an exemption for each child. For the 2013 tax year, the IRS has set the personal exemption at $3,900.

On the other hand, the standard deduction is granted based on tax filing status. Each tax filing household receives one standard deduction regardless of the number of people in the household. Know that the size of the standard deduction varies according to your tax filing status. Each taxpaying household is generally entitled to claim at least one personal exemption along with the standard deduction. If you are at least age 65 or blind, your standard deduction is higher. If you can be claimed as a dependent by another taxpayer, you generally cannot claim an exemption. Your standard deduction may also be reduced. The standard deductions for 2013 for non-dependent taxpayers who are under the age of 65 and are not legally blind are listed below.

  • Single $6,100
  • Married Filing Jointly $12,200
  • Head of Household $8,950
  • Married Filing Separately $6,100
  • Qualifying Widow(er) with Dependents $12,200

What if You Must Itemize?

Some taxpayers must itemize regardless of whether they would benefit financially from doing so. For example, for married couples filing separately, if one partner itemizes his or her deductions, the other partner must itemize his or her deductions also. Likewise, nonresident aliens, dual-status aliens and taxpayers who file for tax periods of less than 12 months are not entitled to claim the standard deduction.

What Kinds of Expenses Can Be Itemized?

The standard deduction is designed to simplify the tax paying process. Often, the standard deduction is at least as large as the total that a taxpaying household could claim by itemizing. This is by design. The figure that the IRS allows for the standard deduction is intended to cover the average amount of total deductions that average taxpaying households would receive if they itemized. However, under certain circumstances, households have larger than average expenses that are eligible for deduction. In such cases, itemizing deductions makes sense. The list below, taken from the IRS website, represents examples of the types of deductions that might make it worthwhile to itemize your deductions.

  • Home mortgage interest
  • State and local income taxes or sales taxes (but not both)
  • Real estate and personal property taxes
  • Gifts to charities
  • Casualty or theft losses
  • Unreimbursed medical expenses
  • Unreimbursed employee business expenses

Limitations on Itemized Deductions

One reason that the standard deduction often exceeds the deductions allowed by itemizing for many taxpayers is that he IRS does not always allow dollar-for-dollar deductions when you itemize. In fact, most itemized deductions must exceed 2 percent of your adjusted gross income before they can be claimed on your federal income taxes. The threshold for other deductions is even higher. When calculating itemized deductions, it is essential to apply the proper thresholds and limitations. Otherwise, you may claim a higher deduction than you are entitled to – which you would have to repay, probably with interest, if the IRS discovers the discrepancy.

For instance, only unreimbursed medical expenses other than insurance premiums that exceed 10 percent of your adjusted gross income may be deducted from your federal income tax returns if you are under age 65. The IRS has instituted a temporary adjustment through December 31, 2016 for taxpayers age 65 and older. While the exception is in place, seniors who itemize may deduct unreimbursed medical expenses that exceed 7.5 percent of their adjusted gross income. Once the exception expires, the 10 percent threshold will apply to all taxpayers, including seniors.

On the other hand, gambling losses are not subject to the 2 percent threshold, but deductions claimed cannot exceed gambling winnings that are reported as income. Likewise, premiums on tax exempt bonds are not subject to the 2 percent threshold. Deductions from the Individual Retirement Account of a deceased spouse are also not subject to the 2 percent threshold, although the surviving spouse must report the income and pay any necessary income taxes.

In addition, the IRS has imposed income limits on claiming itemized deductions that vary by tax filing status.Taxpayers with incomes over specific levels may find that their allowed deductions may be reduced if they itemize.The limitations vary according to tax filing status. The income limits for 2013 are listed below.

  • Single – $250,000
  • Married filing jointly or qualifying widow(er) – $300,000
  • Married filing separately – $150,000
  • Head of household – $275,000

Filing Itemized Deductions

If you itemize your deductions, you must file Form 1040 (the “long form”) along with Schedule A, which is where you will list your itemized deductions. It may be helpful to print out paper copies of both forms to calculate your deductions and total tax obligations. But you should file your tax forms electronically to minimize the risk of errors or a having the return be lost in the mail. Most taxpayers will qualify to complete and file their tax returns for free through the IRS Free File program, which can be accessed on the IRS website.

Standard Vs. Itemized Deductions: It’s Not Permanent

Taxpayers who itemize deductions voluntarily are not bound by their decision in future tax years. And unless you are certain that the standard deduction is financially a better choice, it is worth the effort to calculate your taxes using both the standard deduction and itemized deductions. If your calculations show that the standard deduction is more beneficial to you, you may return to claiming it without penalty from the IRS.