Itemized Deduction. Standard Deduction. What does all this mean?

The difference between Standard and Itemized Deductions is just one of many misconceptions of the IRS tax code. While most taxpayers fall under the standard deduction, more and more people are itemizing as they become knowledgeable as to what expenses can be deducted on their return. Increasing your deductions will allow you to show less taxable income when your liability is calculated, which may result in a higher refund. Be careful, deducting too many expenses can actually result in an audit from the IRS.

In most cases, the standard deduction is usually taken if the taxpayer does not have enough expenses to itemize. The most common deductible expense which allows one to itemize is the home mortgage interest deduction.

The Standard Deduction is a fixed dollar amount that reduces the amount of income on which you are taxed. The Standard deduction may consist of two parts, the basic and an additional standard deduction amount. The amount of your basic standard deduction depends on your filing status and whether you can be claimed as a dependent on another return. For example, if your status is Single or MarriedFiling Separately in 2007 you may receive $5,350; Married filing Jointly may receive $10,700; and if filing as Head of Household you may receive $7, 850. If you are being claimed on another return, your standard deduction would be the greater of an amount specified by law or your individual earned income.

The basic standard deduction may be adjusted every year due to inflation. The additional standard deduction amount varies on your age, filing status, and whether you are blind If you are 65 years old and/or blind on the last day of the tax year, you may qualify for the additional standard deduction.

Is everyone entitled to the Standard Deduction? Most taxpayers qualify for the standard deduction however there are some limitations:

• If your filing status on your return is Married filing separate and your spouse itemizes his or her deductions, you will not be able to claim standard deductions.
• If you are a nonresident alien or dual status alien during any part of the year, or you are filing a return for less than 12 months, you will not be entitled to the standard deduction
• You can only claim one, the standard deduction or the itemized deduction, not both.

An Itemized Deduction, reported on form SCH A, allows a portion of your expenses to be deducted from your adjusted gross income much like the Standard Deduction. Some taxpayers may be forced to itemize because they do not qualify for the standard deduction.

You can list all of your itemized deductions on a Schedule A. Most taxpayers will find that once they list their home mortgage interest expensethey will surpass the set limit for the standard deduction therefore allowing the ability to add more expenses to bring down the taxable income. Keep in mind, only the INTEREST paid during the year on your home mortgage is deductible.

What is Schedule A? The schedule A form is where the deductible expenses are listed, such as medical and dental expenses, out-of-pocket job expenses, home mortgage interest, gifts to charity, state and local taxes, and much more.

As mentioned before, it is very important to understand what expenses are deductible as listing items not under the tax code, or over reporting your expenses may result in an audit. You may find yourself scrambling for paperwork and receipts later on down the road if that were to happen. PriorTax.com has been designed to assist you along the way if you’re unsure if a certain expense can be itemized. Further help is available from our Live Chat Support Team.

Now that you are more familiar with these deduction types, you will be able to decide which will benefit you the most unless you are forced to a certain dduction. The larger tax deduction will lower the amount you owe or it may increase the amount of your refund. When using our website, the larger of the two tax deductions will be automatically selected for you, thus removing any uncertainty from filing your own taxes.