INDIVIDUAL FEDERAL INCOME TAXES

STANDARD DEDUCTION OR ITEMIZED DEDUCTIONS

STANDARD DEDUCTION

Every taxpayer is allowed a standard deduction to be taken against their adjusted gross income. This deduction may be taken regardless of your actual expenses. The basic standard deduction for 2011 for each filing status is as follows:

$5,800 for a single return;
$11,600 for a married filing jointly or a qualifying widow;
$8,500 for a head of household;
$5,800 for married filing separately.

There is an additional standard deduction if you are age 65 or older or blind. The additional amounts are as follows:

$1,450 for a single return or head of household;
$1,150 for married filing jointly, married filing separately or qualifying widow.
On a jointly filed return, the taxpayer and the spouse would each receive the $1,150 if both are age 65 and another $1,150 for each if blind.

If a husband and wife are filing separate returns and neither is a qualifying head of household, they must both claim itemized deductions if one of them does. They must both make the same election. When one itemizes, the other can’t use the standard deduction.

If you are a dependent on someone else’s return, under age 65 and not blind, your standard deduction is generally the greater of $950 or your earned income plus $300, but no more than the basic standard deduction for your filing status. You can increase your standard deduction if you pay real estate taxes.

If you are age 65 or older or blind and you can be claimed as a dependent on someone else’s return, your standard deduction is the greater of $950 or your earned income plus $300, but no more than the basic standard deduction for your filing status. You then add $1,150 if you are married filing jointly or married filing separately. You add $1,450 if you are single or head of household. Double those amounts if you are both age 65 or older and blind. You can increase your standard deduction if you pay real estate taxes.

ITEMIZED DEDUCTIONS

If your itemized deductions are greater than your standard deduction, you should file Schedule A to itemize deductions. Medical and dental expenses, taxes, interest expenses, charitable contributions, casualty and theft losses, job costs and other miscellaneous expenses can be deducted on Schedule A, as itemized deductions.

MEDICAL AND DENTAL EXPENSES

Medical expenses are the costs of diagnosis, cure, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes. Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. Expenses that are merely beneficial to general health such as vitamins or a vacation are not deductible medical expenses.

Tax deductions for unreimbursed medical care are limited. They are deductible only if you have expenses exceeding 7.5% of your adjusted gross income (AGI). Expenses up to 7.5% of AGI are not deductible. Deductible medical expenses include those paid for the taxpayer, the spouse and dependents. Deductible medical and dental expenses include but not limited to the following:

Health insurance premiums that you pay for policies that cover medical care for hospitalization, surgical services, x-rays, prescription drugs and insulin, dental care, contact lenses and long-term care.
Medicines and drugs that are prescribed by a physician but not over-thecounter drugs.
Diagnostic tests, even if you had no symptoms of illness.
Stop smoking programs as well as nicotine withdrawal drugs prescribed by a physician but not over-the-counter nicotine patches and gums.
Exercise and weight reduction programs if your doctor has recommended a program as treatment for a specific condition, such as heart disease or hypertension but not programs to improve your general health. The IRS considers obesity a disease.
Long-term care costs for chronically ill.
Convalescent home care for medical treatment only.
Dental services including cleaning, X-rays, extractions, fillings, oral surgery, artificial teeth, and straightening teeth.
Transportation primarily for and essential to medical care.
Nursing home or home for the aged medical care including the cost of meals and lodging in the home if a principal reason for being there is to get medical care.

TAXES

When you itemize deductions on Schedule A, you may deduct payments for the following taxes:

State, local and foreign income taxes;
State, local and foreign real property taxes;
State and local personal property taxes.

In lieu of state and local income taxes, you may be able to elect to deduct state and local general sales taxes. You may deduct the one that is greater.

INTEREST EXPENSE

You may deduct three types of interest payments; home mortgage interest including home equity loans, points, and investment interest up to the amount of net investment income. Qualified mortgage insurance premiums are also deductible as interest for 2010. Interest on personal loans such as loans to purchase an auto or credit card finance charges are not deductible. Qualifying student loan interest is deductible.

Generally, you may deduct qualifying mortgage interest on up to two residences. If you own more than two houses, you may decide which residence will be considered your second residence for interest deduction. Mortgage interest is either a home acquisition loan or a home equity loans.

A qualifying home acquisition loan is a loan used to buy, build, or substantially improve your principal or second home, provided the debt is secured by that same residence. Interest paid is fully deductible if the total debt does not exceed $1,000,000. This limit applies to home acquisition loans taken out after October 13, 1987. Interest on pre-October 14, 1987 debt is generally deductible, but there may be limits if you refinance the loan.

Interest you pay on home equity debt is deductible if the debt is secured by your first or second home where the amount of the loan does not exceed the lesser of $100,000 or the fair market value of the home reduced by the amount of any acquisition debt. If you have a second home as well as a principal residence, this limitation applies to the total debt for both homes. On loans exceeding the home equity debt limit, interest may be deductible if the proceeds are used for investment or business purposes. Otherwise, interest on the excess is nondeductible personal interest.

The problem with determining the amount of mortgage interest that is deductible is that mortgage companies usually do not include that information of Form 1098 when they report total mortgage interest to the taxpayer. The taxpayer must keep records to determine this if the loan is over $1,000,000 for an acquisition loan or over $100,000 for a home equity loan.

Sometimes points are charged by the lender in addition to the interest rate. Points are either treated as a type of prepaid interest or a nondeductible service fee. If the points quality as interest, they are deductible over the term of the loan unless they are paid on the purchase or improvement of the principal residence. In that case, they are deductible in the year they are paid.

Interest paid on margin accounts and debts to buy or carry other investments is deductible on Schedule A up to the amount of net investment income. If you don’t have investment income such as interest, you can’t deduct investment interest paid. Investment income does not include capital gains or qualified dividends unless you elect to include them. If you do include them, you will not get the lower capital gains tax rate.

CHARITABLE CONTRIBUTIONS

Donations to religious, charitable, educational, and other philanthropic organizations approved by the IRS are deductible as charitable contributions on Schedule A or your tax return. Every cash donation must be substantiated by a cancelled check or account statement or a written receipt from the charity. If the donation is $250 or more, you must receive a written acknowledgement from the organization that indicates whether you received goods or services in return for your donation. A cancelled check is not sufficient evidence for a cash donation of $250 or more.

Depending on the nature of the organization and the donated property there is a deduction ceiling. In general, the deduction ceiling is 50% of adjusted gross income for cash contributions and 30% for contributions of appreciated property held long term.

If you are a volunteer worker for a charitable organization, you may deduct your unreimbursed expenses in providing the services. Your travel expenses can be deducted at 14 cent per mile. If you make a contribution of used clothing or household items, they must be in good used condition or better in order to get a deduction. If the value of these items is over $500, you must file Form 8283 with your return to give description of the property, when you obtained it and how you valued it.

JOB COSTS AND OTHER MISCELLANEOUS EXPENSES

You may be able to deduct a portion of miscellaneous expenses such as employee travel expenses, work clothes expense, union and employee professional dues, investment expenses, legal expenses, tax preparation fees and education expenses. There is a limitation on these deductions. If your expenses do not exceed 2% of your adjusted gross income, you may not deduct them. If they exceed the 2% floor, you may deduct the excess over the 2%.