Tax filing day is less than a month away, and one of the first questions to consider when filing your 2012 tax return is whether to take the standard deduction or to itemize. Most Americans choose the standard deduction because of its simplicity.
While this may make sense for many taxpayers, take the extra steps to determine which option provides the greatest tax benefit for you.
Deductions reduce the amount of your income that is subject to taxation. Consequently, it has the effect of reducing your tax liability and, in many cases, it increases the tax refund for the taxpayer. That is why it is prudent to take advantage of the greatest amount of deductions available to you.
When deciding which option is more advantageous, you must first determine the standard deduction available to you during that tax year, as the amount adjusts annually for inflation. Then, decide on a filing status. Also, be mindful that other variables, such as blindness and age, adjust your standard deduction.
While the standard deduction may simplify your tax return, itemizing can be well worth the trouble if it helps reduce your tax bill. By itemizing deductions, you are telling the IRS that you spent more than the standard deduction on qualifying expenses that are tax deductible. Some of the more common qualifying expenses include mortgage interest, charitable contributions and state and local taxes.
Other miscellaneous expenses qualify if, when combined, they exceed 2 percent of your adjusted gross income. Keep in mind, this 2 percent is a floor, and you can only deduct those qualifying expenses above the 2 percent threshold.
The IRS groups these “2 percenters” into three categories: unreimbursed employee expenses, tax preparation fees and other expenses. Visit www.irs.gov and search for Publication 529, as it is the best resource for expenses that do and do not qualify as a miscellaneous deduction. Documentation of all qualifying expenses is critical in order to reap the benefit.
Whether you use the standard deduction or decide to itemize, make sure to take the following into consideration:
Talk to your spouse: Some couples file their taxes separately instead of filing a joint return. Regardless of the reason for your decision, it is imperative to discuss whether you will itemize or file the standard deduction. Why? Each spouse must choose the same method. Therefore, it is a good idea to mutually decide on the deduction, and when it is more beneficial to itemize, determine a fair way to share the qualifying expenses.
Take away the stress: Instead of trying to figure out which deduction is best, leave it to the tax preparation software. All of the major software programs gather the pertinent information to determine whether the standard or itemized deduction is best for you. If you do not have software that you normally use to file your taxes, then visit the IRS website. Many taxpayers electronically file their federal return for free by using one of the “FreeFile” vendors listed on the IRS website. You should also consult a tax professional, when needed. Simply using software does not mean you always understand the outputs.
When in doubt, confirm: While it is wise to deduct every qualifying expense available to you, it is a good practice to confirm the eligibility of questionable expenses. You can often clarify your ambiguities by searching for “2012 Instructions for Schedule A” on the IRS website. Creativity is appreciated in many areas of life, but your tax return is not one of them. Save yourself the headache and confirm that you are deducting only qualifying expenses on Schedule A.
Life is a journey, plan for it.
Ashleigh Brooker, CFP, is the principal of A.J. Brooker Financial Associates in Columbia. Reach her at info@AJBrooker.com or (803) 724-1235.