IRS Tax Tip 2014-29: Itemizing vs. Standard Deduction: Six Tips to Help You Choose

IRS Tax Tip 2014-29, March 10, 2014

When you file your tax return, you usually have a choice whether to itemize deductions or take the standard deduction. Before you choose, it’s a good idea to figure your deductions using both methods. Then choose the one that allows you to pay the lower amount of tax. The one that results in the higher deduction amount often gives you the most benefit.

The IRS offers these six tips to help you choose.

  1. Figure your itemized deductions.  Add up deductible expenses you paid during the year. These may include expenses such as:
    •  Home mortgage interest
    •  State and local income taxes or sales taxes (but not both)
    •  Real estate and personal property taxes
    •  Gifts to charities
    •  Casualty or theft losses
    •  Unreimbursed medical expenses
    •  Unreimbursed employee business expenses

    Special rules and limits apply. Visit IRS.gov and refer to  Publication 17, Your Federal Income Tax for more details.

  2. Know your standard deduction.  If you don’t itemize, your basic standard deduction for 2013 depends on your filing status:
    •  Single $6,100
    •  Married Filing Jointly $12,200
    •  Head of Household $8,950
    •  Married Filing Separately $6,100
    •  Qualifying Widow(er) $12,200

    Your standard deduction is higher if you’re 65 or older or blind. If someone can claim you as a dependent, that can limit the amount of your deduction.

  3. Check the exceptions.  Some people don’t qualify for the standard deduction and therefore should itemize. This includes married couples who file separate returns and one spouse itemizes.
  4. Use the IRS’s ITA tool.  Visit IRS.gov and use the Interactive Tax Assistant tool to help determine your standard deduction.
  5. File the right forms.  To itemize your deductions, use Form 1040 and  Schedule A, Itemized Deductions. You can take the standard deduction on Forms 1040, 1040A or 1040EZ.
  6. File Electronically.  You may be eligible for free, brand-name software to prepare and e-file your tax return. IRS Free File will do the work for you. Free File software will help you determine if you should itemize and file the right tax forms. It will do the math and e-file your return – all for free. Otherwise, you may file electronically with commercial software, or through a paid preparer.

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Page Last Reviewed or Updated: 07-Mar-2014

IRS Tax Tip 2013-37: Itemizing vs. Standard Deduction: Six Facts to Help You Choose

When you file a tax return, you usually have a choice to make: whether to itemize deductions or take the standard deduction. You should compare both methods and use the one that gives you the greater tax benefit.

The IRS offers these six facts to help you choose.

1. Figure your itemized deductions.  Add up the cost of items you paid for during the year that you might be able to deduct. Expenses could include home mortgage interest, state income taxes or sales taxes (but not both), real estate and personal property taxes, and gifts to charities. They may also include large casualty or theft losses or large medical and dental expenses that insurance did not cover. Unreimbursed employee business expenses may also be deductible.

2. Know your standard deduction.  If you do not itemize, your basic standard deduction amount depends on your filing status. For 2012, the basic amounts are:

• Single = $5,950
• Married Filing Jointly  = $11,900
• Head of Household = $8,700
• Married Filing Separately = $5,950
• Qualifying Widow(er) = $11,900

3. Apply other rules in some cases. Your standard deduction is higher if you are 65 or older or blind. Other rules apply if someone else can claim you as a dependent on his or her tax return. To figure your standard deduction in these cases, use the worksheet in the instructions for Form 1040, U.S. Individual Income Tax Return.

4. Check for the exceptions.  Some people do not qualify for the standard deduction and should itemize. This includes married people who file a separate return and their spouse itemizes deductions. See the Form 1040 instructions for the rules about who may not claim a standard deduction.

5. Choose the best method.  Compare your itemized and standard deduction amounts. You should file using the method with the larger amount.

6. File the right forms.  To itemize your deductions, use Form 1040, and Schedule A, Itemized Deductions. You can take the standard deduction on  Forms 1040, 1040A or 1040EZ.

For more information about allowable deductions, see Publication 17, Your Federal Income Tax, and the instructions for Schedule A. Tax forms and publications are available on the IRS website at IRS.gov  You may also call 800-TAX-FORM (800-829-3676) to order them by mail.
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IRS Tax Tip 2013-36: Home Office Deduction: a Tax Break for Those Who Work from Home

If you use part of your home for your business, you may qualify to deduct expenses for the business use of your home. Here are six facts from the IRS to help you determine if you qualify for the home office deduction.

1. Generally, in order to claim a deduction for a home office, you must use a part of your home exclusively and regularly for business purposes. In addition, the part of your home that you use for business purposes must also be:

• your principal place of business, or

• a place where you meet with patients, clients or customers in the normal course of your business, or

• a separate structure not attached to your home. Examples might include a studio, workshop, garage or barn. In this case, the structure does not have to be your principal place of business or a place where you meet patients, clients or customers.

2. You do not have to meet the exclusive use test if you use part of your home to store inventory or product samples. The exclusive use test also does not apply if you use part of your home as a daycare facility.

3. The home office deduction may include part of certain costs that you paid for having a home. For example, a part of the rent or allowable mortgage interest, real estate taxes and utilities could qualify. The amount you can deduct usually depends on the percentage of the home used for business.

4. The deduction for some expenses is limited if your gross income from the business use of your home is less than your total business expenses.

5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home, to figure the amount you can deduct. Report your deduction on Schedule C, Profit or Loss From Business.

6. If you are an employee, you must meet additional rules to claim the deduction. For example, in addition to the above tests, your business use must also be for your employer’s convenience.

For more information, see Publication 587, Business Use of Your Home. It’s available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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In Case You Missed It-Standard Mileage Rates for 2013

WASHINGTON — The Internal Revenue Service issued the 2013 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2013, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

56.5 cents per mile for business miles driven.
24 cents per mile driven for medical or moving purposes.
14 cents per mile driven in service of charitable organizations.

The rate for business miles driven during 2013 increases 1 cent from the 2012 rate. The medical and moving rate is also up 1 cent per mile from the 2012 rate.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical, or charitable expense are in Rev. Proc. 2010-51. Notice 2012-72 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

AMERICAN TAXPAYER RELIEF ACT-SUMMARY FOR KATHERMAN KITTS CLIENTS READING PLEASURE

Yesterday, the President signed the American Taxpayer Relief Act, which was passed on New Year’s Day. Here is brief summary of selected portions of it, for your review. We can help answer any questions that you may have.

Individual Tax Rates
The Act preserves and permanently extends the Bush-era income tax cuts except for single individuals with taxable income above $400,000; married couples filing joint returns with taxable income above $450,000; and heads of household with taxable income above $425,000. Income above these thresholds will be taxed at a 39.6 percent rate, effective January 1, 2013. The $400,000/$450,000/$425,000 thresholds will be adjusted for inflation after 2013.
The new law, however, does not extend the payroll tax holiday. Effective January 1, 2013, the employee-share of Social Security tax withholding increased from 4.2% to 6.2% (its rate before the payroll tax holiday).

Capital Gains and Dividend Tax Rate
Effective January 1, 2013, the maximum tax rate on qualified capital gains and dividends rises from 15 to 20 percent for taxpayers whose taxable incomes exceed the thresholds set for the 39.6 percent rate (the $400,000/$450,000/$425,000 thresholds discussed above). The maximum tax rate for all other taxpayers remains at 15 percent; and moreover, a zero-percent rate will continue to apply to qualified capital gains and dividends to the extent income falls below the top of the 15- percent tax bracket. Note – The 2010 Affordable Care Act imposes a 3.8% Medicare tax on interest, dividends, capital gains, and other passive income, starting in 2013, and it applies at taxable income over $200,000 for single filers and over $250,000 for joint filers.

Estate and Gift Tax
Federal transfer taxes (estate, gift and generation-skipping transfer (GST) taxes) seem to have been in a constant state of flux in recent years. The Act provides some certainty. Effective January 1, 2013, the maximum estate, gift and GST tax rate is generally 40 percent, which reflects an increase from 35 percent for 2012. The lifetime exclusion amount for estate and gift taxes is unchanged for 2013 and subsequent years at $5 million (adjusted for inflation). The GST exemption amount for 2013 and beyond is also $5 million (adjusted for inflation). The new law also makes permanent portability and some enhancements made in previous tax laws.

Other Act Elements Affecting Individuals
• AMT (Alternative Minimum Tax) – Higher exemptions are made permanent, and indexed for inflation
• IRA distributions to charitable organizations, (for those over age 70) – restored through 2013
• Exclusion for cancellation of debt on principal residence – extended through 2013
• Reduction of itemized deductions for incomes over certain levels, (which was not in place since 2010) – will apply starting in 2013

Business Tax Provisions
Code Sec. 179 business equipment expensing. In recent years, Congress has repeatedly increased dollar and investment limits under Code Sec. 179 to encourage spending by businesses. For tax years beginning in 2010 and 2011, the Code Sec. 179 dollar and investment limits were $500,000 and $2 million, respectively. [This means that you can expense up to $500,000 of equipment or software purchased, so long as you don’t spend more than $2 million in total. Expenditures over the $2 million level reduces the allowable expense amount dollar-for-dollar.] The Act restores the dollar and investment limits for 2012 and 2013 to their 2011 amounts ($500,000 and $2 million) and adjusts those amounts for inflation. However, this increase is temporary. The Code Sec. 179 dollar and investment limits are scheduled, unless changed by Congress, to decrease to $25,000 and $200,000, respectively, after 2013. The new law also provides that off-the-shelf computer software qualifies as eligible property for Code Sec. 179 expensing. The software must be placed in service in a tax year beginning before 2014. Additionally, the Act allows taxpayers to treat up to $250,000 of qualified leasehold and retail improvement property as well as qualified restaurant property, as eligible for Code Sec. 179 expensing.

Bonus depreciation. Bonus depreciation of business equipment is one of the most important tax benefits available to businesses, large or small. In recent years, bonus depreciation has reached 100 percent, which gave taxpayers the opportunity to write off 100 percent of qualifying asset purchases immediately. For 2012, bonus depreciation remained available but was reduced to 50 percent. The Act extends 50 percent bonus depreciation through 2013. The Act also provides that a taxpayer otherwise eligible for additional first-year depreciation may elect to claim additional research or minimum tax credits in lieu of claiming depreciation for qualified property.

While not quite as attractive as 100 percent bonus depreciation, 50 percent bonus depreciation is valuable. For example, a $100,000 piece of equipment with a five-year MACRS life would qualify for a $55,000 write-off: $50,000 in bonus depreciation plus 20 percent of the remaining $50,000 in basis as “regular” depreciation, with the half-year convention applied in the first and last year.

Bonus depreciation also relates to the passenger vehicle depreciation dollar limits under Code Sec. 280F. This provision imposes dollar limitations on the depreciation deduction for the year in which a taxpayer places a passenger automobile/truck in service within a business and for each succeeding year. Because of the new law, the first-year depreciation cap for passenger automobile/truck placed in service in 2013 is increased by $8,000.

Bonus depreciation, unlike Code Sec. 179 expensing, is not capped at a dollar threshold. However, only new property qualifies for bonus depreciation. Code Sec. 179 expensing, in contrast, can be claimed for both new and used property and qualifying property may be expensed at 100 percent.

Research Tax Credit. The research tax credit was restored for 2012 and extended through 2013.

If you have any questions, please contact us.

IRS SUMMERTIME TAX TIPS- Don’t Forget Those Pesky Misc Deductions

Don’t Overlook the Benefits of Miscellaneous Deductions

If you are able to itemize your deductions on your tax return instead of claiming the standard deduction, you may be able to claim certain miscellaneous deductions. A tax deduction reduces the amount of your taxable income and generally reduces the amount of taxes you may have to pay.

Here are some things you should know about miscellaneous tax deductions:

Deductions Subject to the 2 Percent Limit. You can deduct the amount of certain miscellaneous expenses that exceed 2 percent of your adjusted gross income. Deductions subject to the 2 percent limit include:

Unreimbursed employee expenses such as searching for a new job in the same profession, certain work clothes and uniforms, work tools, union dues, and work-related travel and transportation.
Tax preparation fees.
Other expenses that you pay to:
– Produce or collect taxable income,
– Manage, conserve, or maintain property held to produce taxable income, or
– Determine, contest, pay, or claim a refund of any tax.

Examples of other expenses include certain investment fees and expenses, some legal fees, hobby expenses that are not more than your hobby income and rental fees for a safe deposit box if it is not used to store jewelry and other personal effects.

Deductions Not Subject to the 2 Percent Limit. The list of deductions not subject to the 2 percent limit of adjusted gross income includes:

Casualty and theft losses from income-producing property such as damage or theft of stocks, bonds, gold, silver, vacant lots, and works of art.
Gambling losses up to the amount of gambling winnings.
Impairment-related work expenses of persons with disabilities.
Losses from Ponzi-type investment schemes.
Qualified miscellaneous deductions are reported on Schedule A, Itemized Deductions. Keep records of your miscellaneous deductions to make it easier for you to prepare your tax return when the filing season arrives.

There are also many expenses that you cannot deduct such as personal living or family expenses. You can find more information and examples in IRS Publication 529, Miscellaneous Deductions, which is available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

Publication 529, Miscellaneous Deductions (PDF)
Tax Topic 508 – Miscellaneous Expenses
Schedule A Itemized Deductions (PDF)
Instructions for Schedule A (PDF)

IRS Announces 2012 Standard Mileage Rates, Most Rates Are the Same as in July

WASHINGTON — The Internal Revenue Service today issued the 2012 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2012, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 55.5 cents per mile for business miles driven
  • 23 cents per mile driven for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations

The rate for business miles driven is unchanged from the mid-year adjustment that became effective on July 1, 2011. The medical and moving rate has been reduced by 0.5 cents per mile.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical or charitable expense are in Rev. Proc. 2010-51.

Notice 2012-01 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

Related Item: IR-2011-104, In 2012, Many Tax Benefits Increase Due to Inflation Adjustments

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Page Last Reviewed or Updated: 04-Aug-2012
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