5 Simple Strategies to Reduce Tax - Part III

In our last tax-reduction strategy discussion, we showed the list of AGI deduction items.  Now we will focus on whether you should take Standard or Itemized Deduction.

What Are the Two Deductions
After computing your Adjusted gross income (AGI), you can itemize your deductions (from a list of allowable items) and subtract those itemized deductions (and any applicable personal exemption deductions) from your AGI amount to arrive at the taxable income amount.  Alternately, you can elect to subtract the standard deduction for your filing status (and any applicable personal exemption deduction) to arrive at the taxable income. In other words, you may generally deduct the total itemized deduction amount, or the standard deduction amount, whichever is greater.

Factors to Consider
The choice between the standard deduction and itemizing involves a number of factors:

• Standard Deduction is not available to nonresident aliens.
• A comparison between the available standard deduction and allowable itemized deductions - the larger number is generally advantageous
• Whether or not the taxpayer has or is willing to maintain the records required to substantiate the itemized deductions
• If the total itemized deductions and the standard deduction are very close in value, whether the taxpayer would prefer to take the standard deduction to reduce the risk of change upon examination by the Internal Revenue Service (IRS). (The standard deduction amount cannot be changed upon audit unless the taxpayer's filing status changes.)
• Whether the taxpayer is otherwise eligible to file a shorter tax form (like the 1040EZ or 1040A) and would prefer not to prepare (or pay to have prepared) the more complicated 1040 form and the associated Schedule A for itemized deductions.
• If the taxpayer is filing as "Married, Filing Separately", and his or her spouse itemizes, then the taxpayer must itemize as well.

The Bottom Line
It's easy to decide whether to itemize your deductions or take the standard deduction -- figure out what itemized deductions you can take and add them up. If the total is more than the standard deduction for your filing status, then itemize your deductions.

In our next blog post, we will discuss tax-reduction strategy #4 - Utilize Personal Exemptions.