The Standard Tax Deduction

NEW YORK - Forbes.com has teamed up with the authors of Ernst & Young Tax Guide 2006 to develop a series of tips to help you avoid paying more tax than necessary. The circumstances of your situation will determine if you qualify, so review the tax code and check with your tax adviser.

Here are ten things you need to know about the standard deduction.

To Itemize Or Not?

Taxpayers who don't itemize their deductions are eligible for the standard deduction. However, you should determine whether itemizing deductions or taking the applicable standard deduction produces greater tax savings.

Factors To Consider

When determining the amount of your standard deduction, you must consider many factors, including filing status, age, unearned income and whether or not someone is claiming you as an exemption.

Higher Deductions

Higher deductions are allowed if you or your spouse is over age 65, or is totally or partially blind. However, if another taxpayer can claim you as a dependent, your standard deduction may be limited.

Marriage Penalty

The Working Families Relief Act has extended the increased deduction for married couples through 2010. This mitigates the "marriage penalty" where a married couple filing a joint return paid more in taxes than two single individuals with the same income.

Separate Returns

Married people who file separate returns must be consistent in claiming the standard deduction or itemizing deductions. If one spouse itemizes deductions, the other spouse also must itemize deductions and can't claim the standard deduction.

Basic Math

In calculating your taxable income, you should use the larger of your itemized deductions or your standard deduction. With some planning, it may be possible to use the standard deduction in some years and to itemize deductions in others.

Standard Deduction Amount

The standard deduction amount depends on your filing status: whether you're 65 or older, or blind, and whether an exemption can be claimed for you by another taxpayer. In general, the standard deduction amounts are adjusted each year for inflation. The basic standard deduction is $5,000 if single or married and filing separate returns, and $10,000 if married and filing a joint return. It's higher if you are 65 or older or blind.

Blindness

If you are blind on the last day of the year, and you don't itemize deductions, you are entitled to a higher standard deduction. You qualify for the benefit if you are totally or partially blind. If you're single, the standard deduction is $6,250.

Standard Deduction for Dependents

The standard deduction for an individual for whom an exemption can be claimed on another person's tax return is generally limited to the greater of: a) $800; or b) The individual's earned income for the year plus $250--but not more than the regular standard deduction, generally $5,000.

Possible Deferrals

If it's too late to postpone 2005 deductions, you may want to consider whether you should defer items that would otherwise qualify as itemized deductions in 2005 to 2006. The standard deduction won't change in 2006 for married taxpayers who file jointly, except for an inflation adjustment.

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