The answer is that it depends on which option would give you the most benefit.  For any given year, you can make the determination to do either.  To know whether or not you would be a good candidate to itemize your deductions, consider the following questions:

 1. Do you own a home?
 2. Do you pay state income taxes?
 3. Do you contribute money to charity?
 4. Do you have substantial medical expenses?
 5. Do you incur other costs that are attributable to the production of income or the collection of tax (an example would be brokerage fees on investments accounts or tax preparation costs).

If the answer to one or more of these questions is "Yes", it may be time to consider gathering the information together to make the calculation and determine if it is beneficial to itemize your deductions.

The Standard Deduction
The IRS allows everyone a standard deduction from their adjusted gross income when calculating their taxable income.  For 2010, most individuals could deduct $5,700 if they were single or $11,400 if they were married filing jointly.  There are circumstances that can cause the standard deduction to be different.  These circumstances include: low earned income, dependency, elderly or blind. However, these amounts represent what a normal individual can deduct on their tax return.  A taxpayer will generally want to itemize their deductions, only if what they can itemize exceeds the standard deduction.

Itemized Deductions
Itemized deductions allow the taxpayer to reduce their taxable income to the extent that they have paid for specific expenditures.  The main areas are:
  • Medical Expense
  • State and Local Taxes
  • Interest
  • Charitable Contributions
  • Other Miscellaneous
Look for the next few posts to take each of these areas and explain what types of expenditures qualify for each.

~Your CPA Friend


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