Topics
When to Itemize
You should itemize only if your allowable itemized deductions for charitable donations, certain local taxes, interest, allowable casualty losses, miscellaneous expenses, and medical expenses exceed your standard deduction. (Generally, a single person may claim a 2007 standard deduction of $5,350; a head of household, $7,850; a married couple filing jointly or a qualifying widow(er), $10,700; and a married person filing separately, $5,350. Larger standard deductions are allowed to those who are age 65 or over or blind, and lower standard deductions are allowed to dependents with only investment income.) If your deductions do exceed your standard deduction, you can elect to itemize by claiming the deductions on Schedule A of Form 1040.
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When You Must Itemize
If you are married filing separately and your spouse itemizes deductions on his or her return, you also must itemize, even if the standard deduction exceeds your itemized deductions.
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Prepaying or Postponing Itemized Expenses
It is important to pay attention to your finances at the end of the year. You may find that prepaying or postponing the payment of a few bills will tip you in or out of itemizing your deductions.
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On the other hand, making the year-end payment might still not increase your deductions enough to itemize. In that case, you would get no tax benefit from the payment. By postponing the payment until the next year, you may make it easier to itemize on that year's return.
If your year-to-year payments of itemized expenses have consistently been below the standard deduction, a prepayment or postponement strategy may allow you to itemize in at least one of two consecutive years, enabling you to reduce your taxes over the two-year period without increasing your overall expenditures.
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Itemized Deduction Reduction
For those of you in the higher tax brackets, you may find that your itemized deduction is reduced. If your 2007 adjusted gross income (AGI) exceeds $156,400 ($78,200 if married filing separately) some of your itemized deductions are disallowed. First figure your itemized deductions under the regular rules, then reduce the total of otherwise allowable itemized deductions by the following, which are not subject to reduction:
- Medical and dental expenses
- Investment interest
- Casualty losses
- Theft losses
- Gambling losses
Worksheet for Reduction
1. Enter your 2007 adjusted gross income. $_________
2. Enter $156,400 ($78,200 if married filing separately). _________
3. Subtract Line 2 from Line 1. _________
4. Multiply the amount on Line 3 by 3% (.03). _________
5. Enter total allowable itemized deductions from Schedule A. _________
6. Enter the amount included on Line 5 for allowable medical and dental expenses, investment interest, casualty or theft losses, and gambling losses. These deductions are not subject to the reduction. _________
7. Subtract Line 6 from Line 5. _________
8. Multiply the amount on Line 7 by 80% (.80). _________
9. Enter the smaller of Line 4 or Line 8. _________
10. Multiply Line 9 by 2/3 (0.6666). This is the disallowed amount. _________
11. Subtract Line 10 from Line 5. This is the net amount of itemized deductions you may claim on Line 28 of Schedule A for 2007. $_________
Good news: The required reduction to overall itemized deductions is being phased out. For 2007, the reduction is only two-thirds of the reduction that would otherwise be required. For 2008 and 2009, the reduction will be only one-third of the otherwise required reduction. Starting in 2010, the reduction rules will no longer apply.
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I Didn't Itemize, but I Wish I Had
If you filed your return using the standard deduction and want to change to itemized deductions, or you itemized and want to change to the standard deduction, you may do so within the three-year period allowed for amending your return. If you are married and filing separately, each of you must consent to and make the same change; you both must either itemize or claim the standard deduction.
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Summary
- You should itemize only if your allowable itemized deductions for charitable donations, certain local taxes, interest, allowable casualty losses, miscellaneous expenses, and medical expenses exceed your standard deduction.
- You may find that prepaying or postponing the payment of a few bills will tip you in or out of itemizing your deductions.
- For those of you in the higher tax brackets, you may find that your itemized deduction is reduced.
- If you filed your return using the standard deduction and want to change to itemized deductions, or you itemized and want to change to the standard deduction, you may do so within the three-year period allowed for amending your return.
