Tax Tips

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 — $5,800
• Married Filing Jointly or Qualifying Widow(er) — $11,600
• Head of Household — $8,500

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.

Are you overlooking any deductions?

Many deductions are overlooked by taxpayers. Here are some of the deductions you might not realize you can claim when you itemize:

• Deduct unreimbursed business expenses if you itemize your deductions and the total of your employee business expenses is more than 2% of your adjusted gross income.
• Common business expenses include business use of home expenses, rent paid for business space or equipment, does to professional societies, and work-related educations.

Overlooked Deductions

If you're an employee, you can deduct unreimbursed employee business expenses if you itemize your deductions on Schedule A. The total of your employee business expenses must be more than 2% of your adjusted gross income (AGI) to be deductible. Some common business expenses you can deduct are:

1) Business liability or malpractice insurance premiums - You can deduct insurance premiums you pay for:

• Protection against personal liability for wrongful acts on the job
• Professional negligence resulting in injury or damage to patients or clients
• Business use of home expenses - You can deduct part of the operating expenses and depreciation of your home if both of these apply:
• You use a part of your home regularly and exclusively for business purposes.
• You're required to work at home for the convenience of your employer.
• Rent paid for business space or equipment you use in your job

2) Dues to professional societies or a chamber of commerce - If membership in an organization benefits your job, you can deduct the dues you pay. This includes organizations like:

• Bar or medical associations
• Boards of trade
• Business leagues
• Civic or public service organizations like Kiwanis, Lions, or Rotary clubs
• Real-estate boards
• Trade associations

3) Subscriptions to professional journals and trade magazines related to work

4) Work-related education - You can deduct the cost of education that maintains or improves the skills required by your current job, or is required by your employer. Deductible expenses include amounts paid for:

• Tuition
• Books
• Fees
• Equipment

You cannot deduct expenses if:

1. The course isn't related to your job or qualifies you for a new trade or profession.
2. You're required to take classes to meet the minimum educational requirements in effect when you first got the job.

5) Job-search expenses - You can deduct expenses you incur while searching for a new job in your current occupation – even if you don't find one.

Expenses you can deduct include:

• Employment-agency fees
• Costs of preparing or having a resume prepared
• Postage for mailing resumes or other job-search correspondence
• Mileage and parking fees
• Travel expenses, if the trip's primary purpose is to look for a new job

6) Licenses, regulatory fees, and occupational taxes - You can deduct the amount you pay each year to your state or local government for licenses and regulatory fees for your:

• Trade
• Business
• Profession

7) You can also deduct an occupational tax charged at a flat rate by a locality for the privilege of working or conducting a business in the locality.

• Medical and eye exams required by your employer

8) Supplies and general office or operating expenses - You can deduct the cost of tools that wear out and you throw away within 1 year from the date of purchase. However, you must depreciate the cost of tools that have a useful life beyond 1 year and cost $100 or more.

9) Phone expenses - You can deduct the cost of:

• Long-distance calls made for business
• Phone features you use strictly for business
• You can't deduct the base rate of the first phone line into your home, but you can deduct the cost of a second business line.

10) Travel expenses - These are those incurred while traveling away from your home overnight for your employer. Travel expenses include:

• Cost of getting to and from your business destination
• Meals and lodging while away from home
• Baggage charges
• Cleaning and laundry expenses while away from home
  

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