Should You Itemize or Take the Standard Deduction?
The rule for itemizing deductions on your income tax return is simple: You should itemize your deductions if your total deductions are more than the standard deduction. For each dollar that exceeds the standard deduction, you will reduce your taxable income by that amount.
For example, assume your itemized deduction exceeds the standard deduction by $5,000. If you have an effective tax rate of 30 percent, you will save yourself an additional $1,500 in taxes by itemizing ($5,000 x 0.30 = $1,500). Standard deductions can change from year to year, but some standard deductions for the year of 2008 are shown in the following table:
|Filing Status||Standard Deduction|
|Married filing jointly||$10,900|
|Married filing separately||$5,450|
|Head of household||$8,000|
If you’re 65 or older and/or blind, your standard deduction will be even higher.
Use the standard deduction numbers to guesstimate whether the sum of your itemized deductions will exceed the standard deduction that you’re entitled to take. If you own a home, make substantial charitable contributions, or pay substantial state and/or local real estate or property taxes, you will be best served by itemizing. The following worksheet provides you the opportunity to tally up the total of your anticipated deductions if you itemize:
Now that you have determined what your itemized deductions will be, compare the total to the standard deduction. If it's more than (or close to) the standard deduction, you should take the time to itemize your deductions to reduce your tax burden as much as you can.
If you aren’t married but co-own a home with someone, you can actually save a lot of money with proper tax planning. Arrange your expenditures so that one person, preferably the person in the highest tax bracket, pays all the tax-deductible expenses for the household, such as the mortgage payment and charitable contributions. The other co-owner then pays for nondeductible household expenses, such as groceries, utilities, and so on. This way, one of you is able to take the full itemized deduction, while the other one takes the standard deduction. This strategy could save you up to $2,000 per year. However, married couples filing jointly or separately can’t do this.
Overestimating the value of the tax breaks available with home ownership is a common misunderstanding. The after-tax cost of a home mortgage is more expensive than most people are led to believe. For example, assume you have $13,000 in mortgage interest, real estate taxes, and few other deductions. Your total itemized deductions are $13,000. However, you were entitled to a standard deduction of $10,300 regardless of your expenses merely by being married and filing jointly. So the real tax deductible benefit of your home mortgage and property taxes is less than $2,700, not $13,000. Generally, you receive a very small incremental tax break by having a mortgage.