Should I Itemize or Take the Standard Deduction?

By Markets Fool.com


Image source: IRS.

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Taxpayers like to get as large a deduction as possible to save on their taxes. With the choice of itemizing your deductions or taking the standard deduction, most people elect to use whichever method will get them the larger tax break. However, the question of whether to itemize or take the standard deduction does have some nuances that taxpayers need to understand.

The simple math
The first thing you should do is to familiarize yourself with the standard deduction amounts for the year. For 2015 returns, the following figures represent the standard deduction.

Filing Status

Standard Deduction for 2015 Tax Year

Single

$6,300

Married filing jointly

$12,600

Head of household

$9,250

Married filing separately

$6,300

Data source: IRS.

In addition, augmented standard deductions are available for those who are 65 or older or are blind. For single filers, the additional amounts are $1,550 if one condition applies or $3,100 if both apply. Joint filers get a $1,250 increase in their standard deduction for each condition that applies to either spouse, thereby maximizing the increase in the standard deduction at $5,000 if both spouses are 65 or older and are blind.

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The standard deduction is available without any further work required at all. By contrast, to figure out your itemized deductions, you need to add up figures on the following:

  • Medical and dental expenses, but only to the extent they exceed a threshold between 7.5% to 10% of your adjusted gross income
  • State and local taxes
  • Mortgage interest
  • Charitable contributions
  • Casualty, disaster, and theft losses, to the extent they exceed $100
  • Various miscellaneous expenses, to the extent they exceed 2% of your adjusted gross income

If the resulting total itemized deductions exceed the standard deduction, then you'll typically want to itemize. If the standard deduction is larger, then you'll claim it instead of itemizing.

2 tricks to be aware of
As simple as the math is, there are a couple things that make things more complicated. First, for certain high-income taxpayers, the Pease provisions reduce the ability of high-income taxpayers to take itemized deductions. Specifically, the provision requires taxpayers to reduce their itemized deductions by an amount equal to 3% of excess income above certain threshold levels, which are $258,250 for singles, $284,050 for heads of household, $309,900 for joint filers, and $154,950 for married filing separately. So, for instance, if a single person has adjusted gross income of $358,250, then the excess over the threshold is $100,000, and so itemized deductions will be reduced by 3% of $100,000 or $3,000.

The Pease limitation cannot reduce itemized deductions by more than 80%. This maximum reduction typically makes it preferable for most high-income taxpayers to go ahead and itemize even if it is for a lower amount. However, in some isolated cases, the reduction can be enough to swing the pendulum back in favor of taking a standard deduction. Because the Pease limitation doesn't affect your ability to take the standard deduction or its amount, the standard deduction is always available to you as a last resort if you wish.

Also, married taxpayers who file separately have to coordinate their decision on standard and itemized deductions. If one spouse itemizes deductions, the other has to itemize as well. Therefore, it's important to coordinate the decision if you want to make sure that the total tax paid by both spouses is as low as possible.

Choosing between the standard deduction or itemizing your deductions seems like a straightforward decision motivated by math. However, there are some nuances involved. Knowing all the details can help you make a better informed decision that will give you the best result on your tax return.

The article Should I Itemize or Take the Standard Deduction? originally appeared on Fool.com.

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