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Filing Taxes: Will Itemizing Your Deductions Save You Money?

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ItemizedThough we all groan about having to pay taxes, the government is nice enough not to tax us on everything we earn.

There are two big buckets of deductions the government gives us: The first are called "above the line," and the second are called "below the line," which we'll cover here. (The "line" these deductions refer to is a literal line on your 1040 form for the Adjusted Gross Income.)

Below the Line Deductions

You can take your below the line deductions in one of two ways: Either you can claim the standard deduction, or you can claim itemized deductions.

• The Standard Deduction. The standard deduction is an amount of income that the government will not tax any taxpayer on. The Tax Policy Center estimates that about 70 percent of taxpayers take the standard deduction on their returns, which is worth anywhere from $5,950 to $11,900, and opt out of the whole process of itemizing. It's as simple as saying, "I'm a single person (or married filing singly, or married filing jointly), and yes, I would like the standard deduction." For some, this is just fine. After all, that's a lot of money, and taking just the standard deduction makes your taxes simpler and faster. What's not to like? (Check out the chart below to find out what the standard deduction is for your filing status.)



*Do not use this chart if you were born before January 2, 1948, or are blind, or if someone else can claim you (or your spouse if filing jointly) as a dependent. Use Table 7 or 8 on this IRS page instead.

Itemized Deductions. Itemizing your deductions means listing each deduction you qualify for. People do this when the sum of all their deductions is greater than the standard amount. Some things people might itemize include medical expenses, charitable donations and mortgage interest payments.

But How Do You Know Which One Is Right for You?

At stake in this decision are savings in terms of money and time. For some people, taking the time to itemize could save them hundreds or thousands of dollars in taxes.
The most recent study by the General Accounting Office estimated that in 1998, 2.2 million people overpaid their taxes because they chose not to itemize. It seems many of us take the standard deduction because it's easier, because we forgot to keep records during the year, or because we assume we don't have enough deductions to make it worthwhile.

Then again, there are the people who decide to itemize even though it's not worth it. They just made their lives needlessly more complicated (and expensive, if they relied on an accountant to do this for them) for no financial benefit.

Should You Itemize?

Here are some instances in when you should consider itemizing. Did you:
  • Have large uninsured medical and dental expenses?
  • Pay a significant amount of interest or taxes on your home?
  • Have large unreimbursed employee business expenses?
  • Have large uninsured casualty or theft losses?
  • Make large charitable contributions?
And sometimes, you have no choice but to itemize, like when:
  • You are married and filing a separate return, and your spouse itemizes deductions
  • You are a nonresident alien or a dual-status alien
If you're still not sure, take this quiz to find out if itemizing makes sense for you.

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Does Everyone Need to File an Income Tax Return?

Not everyone is required to file an income tax return each year. Generally, if your total income for the year doesn't exceed the standard deduction plus one exemption and you aren't a dependent to another taxpayer, then you don't need to file a federal tax return. The amount of income that you can earn before you are required to file a tax return also depends on the type of income, your age and your filing status.

How to Write Off Sales Taxes

The Internal Revenue Service (IRS) permits you to write off either your state and local income tax or sales taxes when itemizing your deductions. People who live in a state that does not impose income taxes often benefit most from this deduction. However, you might also be better off deducting sales taxes instead of income taxes if you make large purchases during the year and your total sales tax payments exceed those for state income tax. You can use either the actual sales taxes you paid or the IRS optional sales tax tables.

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Scottilla

There is no magic cliff over which you'll save a fortune. If your itemized deductions add up to $12,000, and your standard deduction is $11,900, itemizing will save you the amount of your tax rate on $100, the amount over your standard deduction, or about $25. Are you spending all that money in interest, taxes and donations for nothing? Only if your only benefit from them is a tax deduction.

February 21 2013 at 2:25 PM Report abuse rate up rate down Reply