The time is running out. The deadline for filing your tax return is approaching very fast. But you still have some time to review your financial position. In fact you still have time to look back at the years 2007 and 2006.
The General Accounting office has observed that people who opted for standard deduction are overpaying to IRS almost $1 billion. When you file your return, you have a choice of selecting either standard deduction or itemize your expenses. You have a choice to claim the higher of the two.
After you’ve computed your AGI (Adjusted Gross Income), you need to select one option out of two – either the standard deduction or the total of your itemized deductions. The option of standard deduction is determined on the basis of your filing status (e.g., married filing jointly, single) and certain other circumstances. Itemized deductions are various deductions that are reported on Schedule A of your federal tax return (Form 1040). They involve certain expenses, like medical expenses, charitable contributions, mortgage interest, state taxes etc. If you have enough of these types of expenses, your itemized deductions may exceed your standard deduction. In that case, it would be to your advantage to itemize.
The IRS allows you to deduct a portion of these expenses. You can take this deduction only to the extent that these expenses exceed 7.5 percent of your AGI (Adjusted Gross Income). You need to report the deduction on Schedule A, as an attachment to Form 1040.
The standard deduction is based on the filing status of the taxpayer and is a standard option for taxpayers who don’t have expenses to claim. For 2008, the standard deduction is $10,900 for married couples for filing jointly and $5450 for people filing separately and singles. The standard deduction is $8,000 for the heads of household.
As the name suggests, standard deduction is a standard amount which is fixed for every year and which a taxpayer claims on his return. However itemized deductions are based on allowable expenses which the taxpayer makes during the year. These expenses are to be reported on schedule A. This process involves some work for the taxpayers, but it may reduce the tax burden.
Generally people in the lower tax brackets are the ones who ignore itemized deductions and pay unnecessary taxes. A recent study has observed that taxpayers in the range of $25,000 to $50,000 rank topmost in losing money in taxes by claiming standard deduction and neglecting itemized deductions. And then the tax consultants also contribute. The study estimates that these ‘professionals’ advised more than 50% of their clients who were eligible for itemized deductions, to go for standard deduction in the past few years.
Itemized deductions require the taxpayer to keep a record of the expenses during the year. And if these expenses exceed 7.5 per cent of the AGI, then the taxpayer is entitled to claim these deductions. Many tax code critics say that people choose simplicity and forgo savings in taxes. Once they select the option of standard deduction, they feel that it is the end of their annual tax drill.
The argument for tax consultants is, most of the taxpayers are negligent about keeping records and receipts of their expenses. If they select the option of itemized deductions, then insufficient documentation may result in tax audit which is another headache for the taxpayer. So advising for a standard deduction is a much better and safer alternative for them.
Don’t fall in the trap of simplicity
If you have incurred expenses on medical and other reasons during the year, try to collect all the receipts, statements and vouchers. Add them together and compare this amount with the standard deduction available. This may not take much time, but it will save your money.
If you are filing your return through a tax consultant, force him to make a comparison between the amount of standard deduction available to you and the amount of itemized deductions which you can legitimately claim. To your surprise, by doing this you’ll be able to put hundreds of dollars in your pocket!
Correct your mistakes made in the past
If you have most of the receipts, statements or vouchers of the expenses were incurred for the past three years, there is still time to get some money out of them. If you find that itemized deductions for these years were more than the standard deductions, there is still some time to correct your mistake. You can still file amended returns for the years 2005, 2006 and 2007 to get a decent refund. May be you can go to a tax consultant to file amended returns. Perhaps you can buy a new computer, upgrade your car or clear your credit card dues!