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Does it make sense for you to itemize your tax deductions?Each year, taxpayers have the option of claiming the standard deduction or the itemized deduction. For the tax year 2010, the standard deduction remains unchangedat $5,700 for single taxpayers or for those married filing separately; it also remains unchanged for married taxpayers or qualifying widow(er)s at $11,400; and for head of household, the standard deduction increased to $8,400.

Most taxpayers will choose the standard deduction -- about two out of three taxpayers make this choice. It's quick, it's easy and it allows taxpayers to file what's referred to as a short form, the form 1040-EZ. You may not file a form 1040-EZ if you itemize.For those who choose to itemize, you must file a Schedule A. If your total deductions on Schedule A exceed the standard deduction for your filing status, you can claim that amount as your "itemized deductions."

Homeowners tend to itemize more than other taxpayers. This is because the combination of the home mortgage interest deduction and real estate taxes tend to tip total deductions over the standard deduction amount.

There are, of course, additional expenses that may be deducted on a Schedule A. They include:

Medical and Dental Expenses
Medical and dental expenses are deductible, but only to the extent that they exceed 7.5% of your adjusted gross income (AGI). This is sometimes referred to as a "floor." Here's how it works: Let's say your medical expenses for the year total $4,000, and your AGI is $20,000. You can deduct $2,500 of medical expenses on your Schedule A -- that's the overage of your total expenses. Here's the math: $4,000 of expenses less $1,500 (7.5% of your AGI of $20,000) = $2,500.

If you do not meet the "floor," you may not deduct the expenses. Using the prior example, let's again say that your medical expenses for the year total $4,000, but this time, your AGI is $100,000. You may not claim any medical expenses on your Schedule A since you didn't meet the floor. Here's the math: $4,000 of expenses less $7,500 (7.5% of your AGI of $100,000) = -$3,500.

You can find a list of commonly deductible (as well as what's not deductible) medical expenses here.

Interest You Have Paid
Most forms of personal loan interest haven't been deductible since President Ronald Reagan did away with the personal loan interest deduction in the 1980s, but there are a few exceptions. In addition to the well known deduction for mortgage interest secured on a main or second home, you can deduct investment interest. Investment interest is exactly what it sounds like: interest paid on money you borrowed to be used for investment. However, it's a very specific term and does not include any interest allocable to passive activities or to securities that generate tax-exempt income. Check with your tax adviser to see if you qualify.

Taxes You Have Paid
You can elect to deduct taxes paid in 2010 such as state and local sales taxes or state and local income taxes on Schedule A.

In addition to real estate taxes, you can also deduct personal property taxes if you live in a state that requires you to pay them. To be deductible, personal property taxes must be based on the value of the item and imposed on an annual basis.

You may not deduct federal income taxes paid, FICA (Social Security and Medicare taxes), federal unemployment taxes, customs duties or federal estate and gift taxes. Similarly, license fees for the privilege of driving a car or owning a pet are not deductible.

Charitable Gifts
Charitable donations are an excellent way to reduce your tax burden for the year, while doing something good at the same time. But to properly claim a deduction, you'll need to follow the rules.

Cash deductions, regardless of the amount, must be substantiated by a bank record (such as a canceled check or credit card receipt) or in writing from the organization. The writing must include the date, the amount and the organization that received the donation.

For donations of non-cash items, you can generally take a deduction for the fair market value of the items -- what the item would sell for in its current condition. Non-cash items must be in "good" condition or better, or the contribution is disallowed. There is an exception to the rule: If the item is valued over $500 but not in "good" condition, you may still take the deduction if you have an appraisal for the item. Special rules apply to appreciated stock or other assets, or hard to value items such as artwork and collectibles.

To substantiate your non-cash donation, you need to obtain a receipt from the charitable organization with the name of the charity, the date of the gift, the location of the charity and a detailed description of the property donated. If the non-cash donation is worth more than $250, the reporting requirements increase. Check out IRS Publication 526 for more details.

Casualty and Theft Losses
You can deduct some part of a casualty loss from the damage or loss of your property from any unexpected or unusual event, such as a flood, hurricane, tornado, fire or earthquake. Similarly, you can recover part of a theft loss if the taking was illegal under the law of the state where it occurred. See IRS Publication 584 for more details.

Job-Related Expenses
You can deduct the costs of unreimbursed expenses paid during the year for the purpose of being an employee and are considered "ordinary and necessary" in your line of work. This would include dues and fees necessary to keep your license or certification, tools and supplies used in your work, subscriptions to professional journals and the cost of a uniform (but only if you can't wear the uniform outside of work hours). For a more extensive list, check out IRS Publication 529.

Even better in this market? You can deduct the cost of reasonable job search expenses, including the costs of sending resumes and going on interviews.

There's one drawback: Expenses that are job-related are subject to a 2% floor. That means, similar to health care expenses, you have to meet a certain minimum before you can take any deductions. Assuming your AGI is $25,000, you would have to report expenses of more than $500 (2% of $25,000) before any part of your expenses are deductible -- and then you can only deduct the overage. So, using AGI of $25,000 as an example, if your expenses totaled $800, you could deduct $300: $800 worth of expenses less $500 ($25,000 AGI x 2%) = $300.

Other miscellaneous deductions are generally subject to the same 2% floor (there are a few exceptions). Those would include safe deposit box fees and investment fees or tax preparation fees, including the cost of a tax preparation software or hiring a paid preparer.

Deductible expenses can add up, but they need to be more than the standard deduction in order for it to make sense for you to itemize. Keep all your documentation together, and at tax time, have your tax preparer (or software package) run both scenarios and see which one benefits you the most.

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