Itemized vs.Standard Deductions

The IRS allows the taxpayer to either take the total qualifying “itemizing” deductions like:

• State income taxes paid
• Residential Mortgage interest
• Residential property taxes
• Cash Donations
• Etc.

Note: Depending on taxpayers AGI, deductions may be limited.

Or the “standard deduction” ($10,700 for MFJ in 2007).   Example: assume in 2007 the taxpayer has:

Itemized                                 Standard
Deduction                              Deduction

$8,000 mortgage interest
$2,000 property taxes
$   250 in donations
$10,250                  OR           $10,700

The taxpayer has the option to take $10,250 (itemizing deductions) or $10,700 (standard deductions).  Obviously the taxpayer is going to take the larger of the two deductions.  In this case the standard deduction of $10,700 is larger.

Can The Taxpayer Ever Take Both?
Potentially yes. Assume the taxpayer above has a self employed family member on his/her tax return and the self employed uses 25% of their house as a qualifying home office expense. 25% of the mortgage interest and property taxes ($2,500) has the potential to be a home office business related expense. This qualifying business related expense is an addition to the standard deduction. 

To learn more about self employment, click on tax advantages of being self employed

Tax Advantages of a Lower AGI

Tax credits, deductible phase outs and the taxable % of the taxpayers Social Security benefits are controlled by the taxpayers AGI (Adjusted Gross Income). 

A lower AGI will decrease or eliminate income taxes on Social Security benefits.

A lower AGI increases the taxpayer’s ability to not only qualify for tax credit(s) but to receive the full amount of the tax credit(s).  

A lower AGI also increases the taxpayer’s ability to not only qualify for the deduction(s) but to receive the full deduction amount.

Some of the tax credits and deductible phase outs controlled by the AGI are:

Tax Credits:

• Child tax credit
• Child and dependent care credit
• Education credit
• Retirement savings account credit
• Earned income credit
• Adoption expense credit

Note:  Some tax credits may require taxpayer qualification in addition to lower AGI.

Deductible Phase Outs:

• Student loan deduction
• Rental loss deduction (passive)
• % of itemized deductions (limitations)
• Medical expenses
• IRA deduction
• Un-reimbursed employee expenses deductions

There is a handful of ways to lower your AGI:

Self employed potentially can be one of them.  To learn more click on tax advantages of being self employed

Rental property potentially can be one of them.  To learn more click on click on tax advantages of owning rental property