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Deductions – Standard versus Itemized

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You may reduce your Adjusted Gross Income by the greater of the appropriate standard deduction or your allowable itemized deductions.

The Standard Deductions for 2004 are as follows:

  • $4,850 - Single
  • $9,700 - Married filing jointly, Qualifying Widow(er)
  • $4,850 - Married filing separately
  • $7,150 - Head of Household

Tax Tip: You may now deduct your actual state and local general sales taxes paid or use a standard amount from the IRS table if you elect to do so in lieu of state income taxes. This election is most beneficial to taxpayers in no or low income tax states with high sales taxes.

Itemized Deductions are broken into seven main categories:

  • Medical and dental expenses
  • Taxes (State and local income tax (or sales tax), real estate, personal property)
  • Interest you paid (qualifying mortgage interest, points, investment interest)
  • Charitable contributions
  • Casualty and theft losses
  • Miscellaneous expenses subject to 2% limitation
  • Other miscellaneous expenses not subject to 2% limit
Itemized Deduction Phase-out

If your Adjusted Gross Income exceeds the threshold amount of $142,700 (except married filing separately), you must reduce your itemized deductions by 3% of the excess over the threshold amount. If your status is married filing separately, your threshold amount is $71,350.

Itemized Deduction Tip

It may be beneficial to pay your real estate taxes, car excise taxes and/or state income taxes for the next year (200D) during the current year (200C). In the right situation, this “bunching” of expenses allows you to maximize your deductions in 200C and take the standard deduction in 200D.

For example: Paul has itemized deductions that are similar year after year.

200C 200D 200D
State income tax $400 $400 $800
Real estate tax 1,600 1,600 3,200
Car excise tax 200 200 400
Mortgage interest 3,300 3,300 6,600
Charitable contributions 500 500 1,000
Total $6,000 $6,000 $12,000
Deduction taken $6,000 $6,000 $12,000

Over a two-year period he will get $12,000 in deductions ($6,000 for 200C & $6,000 for 200D).

By prepaying real estate and car excise taxes for 200D in 200C, Paul will have $7,800 of itemized deductions in 200C and $4,200 of itemized deductions in 200D. However, since the single standard deduction ($4,800) is more that his itemized deductions in 200D ($4,200), he will elect the standard deduction in 200D. Thus, his total deduction for the two years is $12,650 ($7,800 for 200C plus $4,850 for 200D).

200C 200D Total for two years
State income tax $ 400 $ 400 $ 800
Real estate tax 3,200 0 3,200
Car excise tax 400 0 400
Mortgage interest 3,300 3,300 6,600
Charitable contributions 500 500 1,000
Total $7,800 $4,200 $12,000
Deduction taken $7,800 $4,850 $12,650
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