Many of you might have to do some precise calculations before you can determine whether to base your end-of-year tactics on claiming the standard deduction (the no-questions-asked amount automatically allowed without having to itemize), or itemizing for outlays like real estate taxes. The law permits you to take one or the other but not both.
The test for itemizing is worth the required record keeping. Only when total itemized deductions surpass the standard deduction would you be entitled to claim anyway. Just how much is your standard deduction this year? There is no one-fits-all answer because the allowable amount is based mostly on your filing status (the category you fall into as a filer, such as married filing jointly, married filing separately, single or head of household) and age. The normal standard deduction amounts are $9,700 for joint filers; $7,150 for heads of household; and $4,850 for singles and married persons filing separately. Married people filing separately have to handle their deductions the same way: if one spouse itemizes, so must the other.
The normal deduction is also $9,700 for a “surviving spouse,” which is IRS lingo for a widow or widower who has a dependent child and is entitled to use joint-return rates for two years after the death of a spouse in 2002 or 2003. There are higher deductions for individuals who are at least 65 by 2004’s close. The deduction increases by $950 for a married person (whether filing jointly, separately or as a surviving spouse) and $1,200 for an unmarried person. Blind individuals are also entitled to the additional $950 or $1,200, more if they are both 65 and blind. For instance, the deduction goes from $4,850 to $6,050 for a single person who is age 65 or older. It rises from $4,850 to $7,250 for a single person who is at least 65 and blind. On a joint return, depending on whether one or both spouses are at least 65, it goes from $9,700 to either $10,650 or $11,600.
Special restrictions decrease the deduction amounts to as little as $800 for individuals (children and elderly parents, mostly) who can be claimed as dependents on the returns of other persons. Deciding whether to use the standard deduction or itemize is further complicated by nondeductible floors for several categories of itemized deductibles, with all of the floors pegged to AGI (adjusted gross income).
Itemizers get full deductions for charitable contributions, state and local income taxes, real estate taxes and interest on most home mortgages. But there are only partial write-offs for three categories of expenses: (1) Medical expenses are deductible only for the amount above 7.5 percent of AGI; (2) casualty and theft losses not covered by insurance or otherwise reimbursed are allowable only to the extent such losses exceed $100 (for each casualty or theft), plus 10 percent of AGI; and (3) most miscellaneous expenses (a category that includes write-offs like return-preparation charges) are allowable only for the portion in excess of 2 percent of AGI.
So an individual with an AGI of $100,000 gets no deduction for the first $10,000 of casualty losses, ditto for the first $7,500 of medical expenses and $2,000 of miscellaneous expenses. But there is a reprieve for gambling losses, which are allowable just to the extent of gambling winnings. Those losses are not subject to the 2 percent floor.
Forget about any deductions for most payments of interest on consumer loans—car payments and credit-card charges, for example. There is a limited exception for interest on student loans. Also, there are restrictions on deductions for interest on money borrowed to finance investments, such as margin accounts used to buy stocks.
E-mail questions and comments to Julian Block at firstname.lastname@example.org .