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Itemize Deductions
Part of sound financial planning is ensuring that you don't pay more taxes than necessary, which means you need to have at least a basic understanding of itemized deductions, even if an accountant prepares your taxes. It's especially important if you prepare your own taxes.
What Is Itemizing?
Each year when you file your income tax return, you have to choose between using the standard deduction (a flat amount) or claiming your actual allowed deductions, called itemizing. If your actual expenses exceed the standard deduction, you'll save money by itemizing.
What's the Difference Between the Standard Deduction and Exemptions?
The standard deduction is a flat amount that you deduct from your taxable income if you don't itemize, and shouldn't be confused with exemptions, which you're entitled to whether you itemize or not (unless your income exceeds certain limits).
Either way, for 2003 you get a $3050 exemption for yourself, $3050 for your spouse, and $3050 for each person you can claim as a dependent.
If you don't itemize, the standard deduction for tax year 2003 is as follows:
$4750 if you file as single
$7000 if you file as Head of Household
$9500 if you're married filing jointly or are a qualifying widow(er)
$4750 if you're married filing separately
You're entitled to an additional deduction, depending on your filing status, if you're over
age 65 or legally blind (see Form 1040). If you can be claimed as a dependent on someone else's return, your standard deduction may be limited.
Should I Itemize or Take the Standard Deduction?
To determine if you have enough deductions to itemize, use Schedule A (included with the long version of Form 1040) to list all of your allowable expenses, and compare the total to the standard deduction for your filing status. If your allowable expenses are more than the standard deduction, you can itemize.
Over the years, the number of allowable deductions has been shrinking, so it's increasingly difficult to itemize. Mortgage interest is the major allowable deduction for most people, and unless you have a very small mortgage, you probably paid enough interest to put you over the standard deduction and make it possible for you to itemize.
What Expenses Are Allowable Deductions If I Itemize?
Some of the most common allowable expenses include:
State and local income taxes
Real estate taxes (if your taxes include service fees for things like trash pickup, recycling, etc., only the portion related to the value of your property is deductible)
State and local personal property taxes based on the value of personal property such as
cars or boats
Mortgage interest
Charitable contributions
Medical expenses (but only if they exceed 7.5% of your Adjusted Gross Income
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