Back when I was a young, single, and hip urbanite, I always assumed that special tax deductions were for married couples with children living in white-picket-fenced houses in the suburbs.
As a result, I was lazy. Sure, I'd read a dozen advice columns urging me to double check, just in case, to find out whether it was more advantageous to use the standard deduction or to itemize my deductions when filing my return. I just never got around to doing the math.
I was also an old fashioned pencil-and-paper filer, too cheap to buy tax software and let the computer optimize my tax situation for me.
Then one year I stumbled across a free tax software package and decided to try it. I was pretty dismayed to discover that I could have been saving quite a bit of money by itemizing my tax deductions. Why? I lived in a high tax city. That much I knew, but I never figured it would be enough to make it worthwhile to itemize.
Sheer laziness prevented me from amending my past tax returns to recoup my overpaid taxes. But I've since realized that cheapness doesn't always pay, and now happily invest the money in tax preparation software every year.
You don't need fancy software to do this math, of course. If you automatically take the standard deduction every year, you just need to temporarily step outside your assumptions and see whether it pays to itemize.
For your 2006 tax returns, due in just a few weeks, the law sets the standard deduction as $5,150 for singles, $10,300 for married couples, and $7,550 for heads of households. (The numbers differ slightly for anyone over age 65 or blind.)
To make it worth your while to itemize, your eligible deductions must exceed that amount. Home ownership may be one of the most common things to punt people beyond the standard deduction and into the world of itemized deductions. You can't beat the tax benefits of deducting your mortgage interest, property taxes, and other costs associated with the place you call home sweet home.
But, contrary to my foolish assumptions, that's not the only way. Here are some other indicators that it might be more beneficial to toss the standard deduction aside, sharpen your pencil, and start itemizing.
- You live in a high tax state. Unless you scrutinize every paycheck, you might not realize just how much you're paying in state and local taxes. It might be enough to make itemizing worthwhile.
- You had high medical and dental expenses, not reimbursed by insurance. To make these costs deductible, they must exceed 7.5% of your adjusted gross income. That's high enough to make it difficult for many people to deduct a lot of medical and dental expenses. But, if you suffered a health catastrophe and you lacked insurance, for example, you'll want to check it out.
- You were particularly generous this year. Maybe you inherited money from Aunt Maude and decided to give a lot of money to your favorite charities; maybe you donated a car or other major item. Any of these gifts to charity can be deducted from your income tax payments. If you're an avid volunteer, don't forget to add up money spent in volunteer services, including your car mileage.
- You spent a lot of time and money searching for a new job. As long as you're looking for a new job in the same line of work, your expenses on resumes, telephone calls, travel, hotel costs, meals, and career counseling fees incurred while looking for work can be deducted.
- You spent a lot of time and money on your current job. Educational expenses to help you become better at your current profession may be deductible, along with other job expenses that didn't get reimbursed by your employer. That includes union dues, professional dues, subscriptions, and travel.
Take a look at your expenses in these major categories and then add them up. Some tax breaks will be subject to rules and limitations, but you don't need to be exact to get the sense of whether you'll be profiting by itemizing your deductions.
The complexity of tax laws means this list is far from complete. If you think it might be worth your while to itemize, you'll probably be inspired to search a little deeper. The Fool's Tax Center is a good place to start your search, with helpful hints on a number of tax topics.
If you need more help, turn to your computer or a professional. It's no wonder that H&R Block
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Fool contributor Mary Dalrymple still fancies herself young and hip, and she does not own stock in any company mentioned in this article. She welcomes your feedback. The Motley Fool has a disclosure policy.