It's tax time! If you've been dealing with high tax bills for the last few years, you may be wondering how you can possibly reduce your tax liability this time around. Have you thought about changing which deduction you're claiming this year? The IRS gives taxpayers the option to decide whether to claim the standard deduction or to take itemized deductions. So, should you take the standard deduction or itemize? The answer as to which you should claim depends on your tax filing status and your adjusted gross income for that year.
Claiming the Standard Deduction
The standard deduction is a fixed amount that the IRS allows taxpayers to claim each year to reduce their tax liability. The amount rises every few years for inflation and varies depending on your tax filing status. For example, in 2012, the IRS is allowing single filers to claim a standard deduction of $5,950, while married couples who file jointly can get a standard deduction of $11,900. Individuals who are blind or aged 65 and older qualify for an additional standard deduction amount on top of the standard deduction for their filing status.
What Qualifies as an Itemized Deduction?
On the other hand, the amount of itemized deductions you can claim is only limited by the amount of your taxable income. Several items are eligible for deduction, including medical expenses that have not been reimbursed, home mortgage interest, real estate taxes, charitable donations, and employee business expenses. Some items are subject to certain limitations or qualifications. For example, taxpayers who want to deduct medical expenses can only deduct the amount that exceeds 7.5 percent of adjusted gross income. In addition, unreimbursed employee business expenses must exceed 2 percent of adjusted gross income in order to be deducted.
Which Deduction Should You Claim?
How can you tell which type of deduction you should claim? Generally, you'll always want to choose the deduction that gives you the biggest tax break. If the amount of your itemized deductions is greater than the standard deduction, it's usually in your best interest to claim them.
The only time that it may be advisable to choose the lower amount is if you are trying to claim itemized deductions on your state return to take advantage of a large tax break. In this case, you'll need to itemize on your federal return as well, even if the amount is lower than the standard deduction.
Should you take the standard deduction or itemize? It's ultimately up to you. But when you choose the one that gives you the most tax benefit, you'll see the difference on your return.
