Itemized deductions can be deducted from the adjusted gross income (AGI) of the taxpayer usually only to the extent the same exceeds 2% of the AGI, on the tax return in Schedule A of Form 1040.
Taxpayers have a choice when filling in their tax returns.
Either from the adjusted gross income (AGI) they may subtract the itemized deductions (from a list of permissible items) and applicable personal exemption deductions, to arrive at the taxable income.
In the alternative, they may subtract the standard deductions from the adjusted gross income to reach the taxable income figure.
The taxpayer should deduct from the adjusted gross total income either the standard deduction or the total of the itemized deductions, whichever is larger, in order to reduce his taxable income.
Standard deduction is a fixed dollar amount that reduces the amount of taxable income. The amount of the basic standard deduction depends upon the filing status on the tax return. However, if the taxpayer is dependent on someone else, his standard deduction amount may be different. In some cases, the standard deduction consists of two parts, the basic standard deduction, and an additional standard deduction amount depending on age, blindness, or both.
The choice between standard deduction and itemizing depends on the following considerations:
- Maintenance of records and accounts to substantiate the expenses of itemized deductions
- Where the amounts of itemized deductions and standard deduction are very close, the preference of the taxpayer for standard deduction to avoid the risk of disallowance or adding back of expenses by the Internal Revenue Service. Since standard deduction is fixed, it is not liable to reduction by the Revenue Authorities.
- The taxpayer’s preference to a shorter tax form for standard deduction and his aversion to filling up a complicated tax form for itemized deductions.
Most itemized deductions are deductible from the adjusted gross income (AGI) only to the extent the concerned expenditure exceeds 2% of the taxpayer’s AGI. Similarly, medical and dental expenses are deductible from the adjusted gross income (AGI) only to the extent the concerned expenditure exceeds 7.5% of the taxpayer’s AGI.
Expenditures qualifying for itemized deductions include:
- Medical and dental expenses
- State and local income taxes and sales tax
- Home mortgage and investment interest
- Charitable contributions
- Real estate and personal property taxes
- Home mortgage interest
- Casualty and theft losses
- Job expenses
- Miscellaneous deductions
The following individuals must itemize as they cannot avail of standard deduction:
- An individual who is a nonresident alien or dual-status alien during any part of the current tax year. Dual status occurs when you are considered both a nonresident and resident alien during the same year.
- An individual who has changed his accounting year and is filing a return for a period of less than 12 months
- A married person, whose spouse is already itemizing deductions, filing separately.
(More:http://www.irs.gov/taxtopics/tc500.html)
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