Deductions decrease the amount of income you are taxed on, lowering your tax liability. At tax time, you can chose one of two methods to claim your deductions. You can either itemize or opt for the standard deduction. The standard deduction amount is calculated depending on factors such as filing status, taxpayer age, and income levels. It is recalculated each year.
While taking the standard deduction is easier, there are some taxpayers who are ineligible to use this method:
- Those who file using Married, filing separately status and one spouse itemizes. The other spouse must also itemize.
- Taxpayers who file a return for any length of time less than a full twelve months, due to modification of annual financial accounting.
- A nonresident alien or dual status alien. If you are a nonresident alien married to a U.S. citizen at the end of the tax year, you can chose to be taxed as a U.S. citizen and may receive the standard deduction.
- Taxpayers with estates, trust funds, or partnerships
If you have deductions that exceed the amount of the standard deduction, it’s advised that you opt to itemize. You may be able to lower your tax amount if you chose to itemize. Complete Form 1040 Schedule A in order to claim itemized deductions. State and local sales tax, income fees, mortgage fees and interest, and disaster losses are al included in itemized deduction amounts. Additionally, you may be able to deduct charitable contributions and medical or dental expenses.
Typically, you should chose to itemize your deductions if you:
- aren’t eligible to take the standard deduction
- Incurred large medical or dental expenses that weren’t reimbursed by insurance
- Gave a large amount of donations to charity
- Paid interest or fees on your mortgage
- Experienced a large amount of casualty or theft
- Incurred large unreimbursed expenses for business
These types of expenses will likely give you a bigger deduction if you chose to itemize, but you may be limited by a set maximum deduction. Also, depending on your income, your total deductions may be phased-out as your adjusted gross income reaches certain levels, dependent on your filing status:
- Single – $254,200
- Married filing jointly or qualifying widow(er) – $305,050
- Married filing separately – $152,525
- Head of household – $279,650
The threshold limits are listed in the instructions for filling out a Form 1040. Using the worksheet for itemized deductions, on Line 29, you can determine whether your deductions are subject to a phase-out.