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Deductions

What is the difference between itemized and standard deductions?

Tax deductions allow you to reduce your taxable income and also your tax bill. A tax deduction differs from a tax credit, which is applied directly to your tax bill, reducing it dollar for dollar. There are 3 major categories of tax deductions.

The Standard Tax Deduction

Most taxpayers claim the standard deduction — a fixed amount that reduces the income on which you are taxed.

Here are the standard deduction amounts according to filing status:

• Single or Married Filing Separately — $5,700
• Married Filing Jointly or Qualifying Widow(er) — $11,400
• Head of Household — $8,350

For 2008 and 2009 only, up to $500 for single filers ($1,000 for joint filers) of real estate taxes (property taxes) paid can be added to the standard deduction. State and local sales and excise taxes paid on the purchase of new cars, light truck, recreational vehicles, and motorcycles through 2009 are also deductible for non-itemizers. This deduction is for 2009 only and is subject to an adjusted gross phase-out in excess of $125,000 (single) and $250,000 (joint).

Itemized Tax Deductions

If total itemized tax deductions are more than the standard deduction, it's usually a good idea to itemize. For most taxpayers, purchasing a home makes it worthwhile to itemize deductions because they can deduct interest, real estate tax, and, for loans taken out after 2006, certain mortgage insurance premiums (PMI).

Here are some popular itemized deductions:

• Medical expenses — In addition to what you've spent on doctors, hospitals and medicine, other tax deductible items include health insurance premiums, long term care insurance premiums, prescription eyeglasses and contact lenses, hearing aids, medical transportation, equipment for disabled people, and nursing home expenses.
• State and local income taxes — This category includes state and local income tax or sales tax, personal property tax, and real estate tax
• Interest – Deductible items in this category are home mortgage interest, some home equity loan interest, and qualified mortgage insurance premiums.
• Charitable contributions — These include cash and property such as new and used household goods and items, securities, and vehicles donated to qualified charitable organizations. Volunteer expenses also can be deducted.  However, the value of your volunteer time can not be deducted.
• Casualty losses — If you suffered a loss because of theft, fire, storm damage or other casualty, you can deduct an un-reimbursed loss if it is more than the sum of $100 and 10% of your adjusted gross income.
• Un-reimbursed employee expenses — Tax-deductible expenses include vehicle expenses (other than commuting), travel expenses, uniforms, special clothing, tools, professional journals, and union dues.
• Miscellaneous expenses — Safe-deposit box fees, investment expenses, tax preparation fees and certain legal fees are examples of miscellaneous tax deductions. The tax deduction for this category of expenses is allowed only for the total of these expenses and un-reimbursed job expenses that is more than 2% of your adjusted gross income. Note: There are a few miscellaneous tax deductions that are not subject to the 2% floor. These include repayments of amounts exceeding $3,000 that you previously included in your income, gambling losses (only to the extent of gambling winnings), estate tax on income in respect of a decedent, and a decedent's investment in a pension.

Above-the-line Tax Deductions (Adjustments to Gross Income)

If you qualify, you can claim these tax deductions even if you don't itemize. There are also above-the-line tax deductions for self-employed individuals.

• Educator out-of-pocket expenses — up to $250
• Student Loan Interest Deduction — up to $2,500
• Tuition and Fees Deduction — up to $4,000 of qualified higher education expenses
• Moving expenses — the cost of moving your family and belongings to a new job location
• Alimony paid
• Military reservists deduction — a tax deduction for un-reimbursed travel expenses for reservists who travel more than 100 miles from home and stay overnight
• Traditional IRA contributions — up to $5,000 ($6,000 if 50 or older)
• Contributions to HSA’s (health savings accounts)

Above-the-line tax deductions for self-employed individuals:

• Half of your self-employment (Social Security and Medicare) tax
• 100% of self-employed health insurance premiums for yourself and family
• Contributions to self-employed retirement plans, such as SEPs and SIMPLE plans

Related IRS Publications: 502, 526, 529, 530, 535, 936