Most taxpayers can choose whether to take the standard deduction or to itemize deductions on their federal income tax returns.  The standard deduction is a fixed dollar amount that depends on your filing status.  And, the standard deduction is higher for taxpayers who are age 65 or older, or blind.  The standard deduction amounts generally change each year and can be found in the instructions and publications the Internal Revenue Service (IRS) updates each year.

Taxpayers Who Cannot Take the Standard Deduction

There are certain persons who cannot take the standard deduction and must itemize.  These include:

1. Married persons filing separately, whose spouse itemizes deductions.  (But you can agree to both itemize or both take the standard deduction, whichever way results in a lower overall tax for the two of you.)
2. A taxpayer filing a tax return for a short year, because of a change in the annual accounting period.
3. Persons who were nonresident or dual-status aliens at some time during the year.  A dual-status alien is a person who was both a nonresident and a resident alien during the year.  But if you are a nonresident alien married to a U.S. citizen or resident at the end of the year, you can elect to be treated as a U.S. resident, in which case you could take the standard deduction.  But if your are treated as a U.S. resident, you will be subject to U.S. federal income tax on your worldwide income.

Taxpayers Whose Standard Deduction May Be Limited

If you can be claimed as a dependent on another person’s tax return, your standard deduction is generally limited to the greater of:

1. $800, or
2. Your earned income for the year plus $250, but in this case the amount cannot exceed the regular standard deduction amount.

If you (or your spouse if you are married and are filing jointly) can be claimed as a dependent by someone else, you will need to use a table entitled “Standard Deduction Worksheet for Dependents” that you can find in the instructions for Form 1040 or 1040A, and in IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.

Earned Income

Earned income for purposes of a limited standard deduction includes salaries, wages, tips, professional fees, and any other amount received for services you performed.  If you are a student, the amount of any scholarship or fellowship you had to include in income also counts as earned income in figuring your standard deduction.

Higher Standard Deduction for Age 65 or Older or Blind

Age 65 or Older

Your standard deduction is higher if you are age 65 or older at the end of the year.  For these purposes, you are considered 65 on the day before your 65th birthday, so if you become 65 on January 1st, you are considered 65 for the previous tax year.

Blind

You are also entitled to a higher standard deduction if you are blind on the last day of the year.  If you are partially blind, you must have a certified statement from an eye doctor, stating that:

1. You cannot see better than 20/200 in your better eye with glasses or contact lenses, or
2. Your field of vision is not more than 20 degrees.

You should keep this statement with your records, to support your increased standard deduction.

Spouse

If your spouse is age 65 or older, or blind, you can also increase your standard deduction if :

1. You file a joint return, or
2. You file a separate return and can claim an exemption for your spouse and your spouse had no income.

The increase in your standard deduction for being age 65 or older, or blind, applies only to you and your spouse, and not to other dependents.

Where To Find Amounts

There is a special table entitled “Standard Deduction for People Age 65 or Older or Blind” in the instructions for Form 1040, and in Publication 501.  The amount of your standard deduction increases based on the number of boxes you check for qualifying conditions of age or blindness of you and/or your spouse.

When To Itemize

Itemized deductions include the following:

• Medical and dental expenses
• State and local income taxes or sales taxes, real estate taxes, and personal property taxes
• Interest on a home mortgage or interest on a loan used for investment purposes
• Charitable contributions
• Casualty and theft losses
• Un-reimbursed employee expenses
• Other miscellaneous deductions

If you had significant expenses in these categories, you may benefit from itemizing deductions, and you may want to go through the calculation to see which results in a lower tax – using the standard deduction or itemizing deductions.

Limitations

When you itemize deductions, you should keep in mind that the amounts you can claim are the amounts after any insurance or other reimbursement.  And there are certain limitations on some deductions.  For example:

• You can claim an itemized deduction for your un-reimbursed medical and dental expenses only to the extent they exceed 7.5% of your adjusted gross income.  You may have had significant medical and dental expenses, but they may be offset by the limitation.
• Un-reimbursed employee expenses and other miscellaneous expenses are generally subject to a 2% of adjusted gross income limit.
• Also, if your adjusted gross income is over a certain amount, your overall itemized deductions may be limited.  This amount may be periodically changed (generally increasing year by year).  In the instructions for Schedule A, you can find a worksheet to calculate your allowable itemized deductions if you are subject to this overall limit.

Timing of Expenses

Aside from the rules described above for taxpayers who cannot take the standard deduction, and for married taxpayers filing separately, you can choose between the standard deduction and itemized deductions each year.  You may have more expenses in one year than in another.  Generally, it may be to your advantage to itemize in years when:

• You have a large amount of uninsured medical and dental expenses.
• You paid a significant amount of taxes or interest on your home (perhaps in the year you buy your home).
• You paid an unusual amount of state sales tax (when you purchase a vehicle, for example).
• You had uninsured casualty or theft losses (damage from a storm).
• You made significant charitable contributions.
• You had a large amount of un-reimbursed employee expenses (if you spent a significant amount looking for work, for example).

Effect of Adjusted Gross Income

You should also keep in mind the effect your adjusted gross income has on your ability to itemize.  Your adjusted gross income works against you, for purposes of itemizing deductions, when it is higher, because the limitations will be higher.  But your adjusted gross income will work in your favor, for itemizing, when it is lower.  There may be years when your level of income is lower and you have the same level, or more expenses.  In these years, itemizing may worthwhile.

In any case, if you are in doubt about whether to take the standard deduction or to itemize (provided you have the choice), you should calculate your taxes both ways, to see which way results in the lower overall tax cost.

Special Cases

Electing to Itemize for State Income Tax Purposes

You may find that it is to your advantage to itemize deductions for federal income tax purposes, even if your total itemized deductions are less than your standard deduction.  You might want to do this, for example, if you can gain an overall  tax savings by itemizing deductions on your state tax return, but in order to do so, you must also itemize for federal income tax purposes.

Amended Return if You Change Your Mind

If you use one method (either take the standard deduction or itemize) and after you file your return you find that you should have used the other method, you can file an amended return using Form 1040X.

Married Filing Separately

Married persons filing separately can make a change only if they both agree to make the same change.  And both must file a consent to assessment of any additional tax either spouse may owe as a result of the change.

You and your spouse can use whichever method results in the lower overall tax, even though one of you may pay more tax than you would have if you had used the other method.  But you should generally use the same method, because if one spouse itemizes, the other cannot take the standard deduction.