When Does it Make Sense to Itemize Your Taxes?
Feb 10th 2011 10:00AM
Updated Mar 4th 2011 7:26AM
For the tax year 2010, the standard deduction is $5,700 for single taxpayers or for those married filing separately; $11,400 for married taxpayers or qualifying widow(er)s; and $8,400 for heads of household. If the total of your itemized deductions is greater than the deduction for your filing status, then it usually makes sense to itemize (some exceptions apply, so keep reading).
Use Schedule A on a federal form 1040 to figure your itemized deductions. It's important to note that you cannot use a form 1040-EZ or a form 1040A; you can read more about forms in the 1040 series here.Who's More Likely to Itemize?
There are some taxpayers who are more likely to itemize than others, though this is certainly fact and circumstance specific. Here are a few taxpayer profiles that might find itemizing advantageous:
Homeowners. You can deduct qualified mortgage interest secured on a main or second home, which makes the deduction especially attractive for new homeowners or those who have recently refinanced their mortgages. Additionally, you can deduct real estate taxes paid. The combined totals of mortgage interest and real estate taxes push many homeowners over the standard deduction, making it practical to itemize.
Self-Insured. The threshold for medical expenses is fairly high -- you can deduct only the part of your medical and dental expenses that exceeds 7.5% of your adjusted gross income (AGI). So, as an example, if your AGI was $40,000, you could only deduct medical and dental expenses that exceed $3,000. If your medical expenses were $5,000, then you could claim a $2,000 deduction. That sets the bar fairly high. However, with health insurance premiums skyrocketing these days, those taxpayers who pay their own health insurance premiums in total or in part may reach the threshold fairly quickly.
Donors. Making charitable donations isn't usually enough on its own to make sense to itemize, though combined with other deductions, it may still qualify. However, donating big ticket items (like a car) or a number of smaller items in one year could be enough to push you over the standard deductions. Keep your receipts throughout the year so that you can easily determine how much -- and to whom -- you made a donation.
Big Spenders. If you live in a city or state that charges a high rate of sales tax, like Chicago, or if your city or state charges quirky sales taxes, you may benefit from those taxes come tax time. You have the option of deducting sales tax on your income tax return. If you pay a lot in tax -- or if you made a lot of big ticket purchases in 2010 -- itemizing on your federal income tax return might make it a bit less painful.
Victims of Federal Disasters. 2010 was a crazy year for weather. There were a number of federally declared disasters. Taxpayers who live in those areas may qualify for certain tax breaks, including casualty losses. Depending on the nature of those losses, they can really add up, making itemizing more attractive.
Nonresident or Dual-Status Aliens. Nonresident or dual-status aliens aren't eligible for the standard deduction. In that case, you should try to itemize your deductions, assuming you qualify.
Who Might Not Want to Itemize?
Taxpayers Filing Married Filing Separately. When you file married filing separately (as opposed to married filing jointly), even though you are filing separate returns, you and your spouse must agree that you will both itemize your deductions or that you will both claim the standard deduction. You may not file one way and your spouse file another, so talk it over before you file.
Seniors. If you're a senior, you're certainly eligible to itemize your deductions if you otherwise qualify. However, keep in mind that you are entitled to a higher standard deduction if you're age 65 or older at the end of the year.
Blind Taxpayers. As with seniors, if you're blind on the last day of the tax year, you're entitled to a higher standard deduction. You qualify if you are totally or partially blind.
If you're not sure whether you have enough deductions to itemize, and you're not otherwise prohibited from claiming the standard deduction, run the numbers and see what happens. Your tax professional or tax software should be able to walk you through the steps and help you make the best decision for your individual situation.