When It Pays to Itemize

The enhanced standard deductions that many taxpayers took advantage of on their 2009 tax returns -- for buying a new car or paying property taxes when they didn’t itemize -- are history. Without those extra deductions, more of your income may be taxed. So when you sit down to prepare your tax return for 2010, make sure you’re making the most of your write-offs when you choose between claiming the standard deduction and itemizing your tax-deductible expenses.

For 2010, the standard deduction is $5,700 if single or married filing separately, $8,400 if head of household with dependents, or $11,400 if married filing jointly. In addition, you can claim an extra $1,100 deduction for each taxpayer or spouse who is 65 or older or for taxpayers of any age who are blind. (A married person filing separately may not claim any standard deduction if his or her spouse itemizes on a separate return, even if the standard deduction would result in a bigger tax savings.) You should claim the standard deduction only if it exceeds the amount you could claim by itemizing deductions. You may benefit from itemizing your deductions on Schedule A if you:
•do not qualify for the standard deduction;
•had large uninsured medical and dental expenses during the year;
•paid interest and taxes on your home;
•incurred large unreimbursed employee business expenses or other miscellaneous deductions, such as tax-preparation fees or investment expenses;
•experienced large uninsured casualty or theft losses; or
•made sizable contributions to qualified charities.
Although 70% of taxpayers claim the standard deduction, millions may be leaving money on the table because they don’t take the time to keep all the receipts and documentation that could add up to a bigger tax break than the standard deduction allows.

The wealthy win big

High-income taxpayers get a big break on their 2010 returns -- there’s no limit on the itemized deductions they can claim to reduce their taxable income. Over the past 20 years, the wealthiest Americans have had to forfeit up to 80% of their itemized deductions when their income topped certain thresholds. Normally, the squeeze on itemized deductions begins when income tops about $83,000 for individuals or $167,000 for married couples filing jointly (amounts are indexed for inflation each year). But this year is different. High earners can use the full value of their itemized deductions to reduce their taxable income. (However, restrictions still exist for deducting charitable contributions: They can’t exceed 50% of your adjusted gross income, but excess deductions can be carried over to future years.) Originally, the high-earner tax squeeze, which has gradually been reduced since 2006, was scheduled to disappear completely only in 2010. But Congress extended the tax relief through 2012 as part of the massive tax package approved just before Christmas.