Tax Basics:

Choosing Standard or Itemized Deductions

Although itemizing is an easy concept to grasp in and of it, the rules and strategies behind it can be complex. Your client has two choices when it comes to deductions on their tax return: itemize their deductions or take the standard deduction. There is a very simple way to determine if they should itemize their deductions – if the combined total of their itemized deductions is greater than the standard deduction for their filing status, then do it!

Itemized deductions are expenses they can use to lower their taxes. For 1999, the categories of itemized deductions are as follows:

  • Medical and dental expenses
  • Home mortgage and investment interest
  • State and local taxes
  • Charitable contributions
  • Casualty and theft losses
  • Job expenses
  • Miscellaneous deductions

Here are the standard deductions for 1999:

Single $4,300
Unmarried head of household $6,350
Married, filing separately $3,600
Married filing jointly or qualifying widow(er) $7,200

There are certain circumstances and situations under which taxpayers are force to itemize their deductions. This may be true for your client if they meet any of the following criteria:

  • They are a nonresident alien or dual-status alien
  • They are married and filing separately and their spouse is taking itemized deductions
  • They are filing a return for a period of less than 12 months
  • They are a US citizen who can exclude income from US possessions

If your clients chooses or are made to itemize their deductions, the key is to maximize the value of their expenses. Here is where all their good record keeping and planning will come in to save them money on their taxes. Keep in mind however that certain itemized deductions, such as medical and miscellaneous deductions, must exceed a certain base amount before they are allowed to claim them on their tax return. For example, medical expenses are not allowed as itemized deductions unless they exceed 7.5% of your client's adjusted gross income. Even then, only the amount that exceeds the 7.5% is deductible. Say their adjusted gross income is $100,000 and they have incurred $10,000 in medical expenses. In order to qualify for the deduction, your client must have at least $7,500 in medical bills (7.5% of $100,000 AGI.) Now that we have determined that they qualify for the deduction they must figure the actual amount they may deduct. Since only the amount over 7.5% is deductible, their actual medical deduction would be for $2,500 ($10,000 - $7,500.)

The same holds true for miscellaneous deductions. In this case, the base they must exceed to qualify for the deduction is 2%. Therefore, if your client's adjusted gross income is $100,000 and they have $5,000 in miscellaneous deductions, the first $2,000 in miscellaneous expenses does not count and their deduction would be for $3,000.