Source: via Flickr.

When it comes to tax deductions, which reduce the amount of income on which you're taxed, you have two main options: the standard deduction and an itemized deduction. You can take whichever is greater, so you'll want to figure out which option lowers your taxes the most. But first, there's a lot you need to know about the standard vs. itemized deduction.

Understanding the process
First, understand where these deductions show up in the tax-calculation process. Put together all your income for the year (which might include salary, interest, dividends, alimony, and gambling winnings), and you have your "gross income." You then make any adjustments to it, such as contributions you made to qualifying retirement accounts (think traditional IRA or conventional 401(k)), qualifying moving expenses, alimony payments you made, and other "above-the-line" deductions that lead to your "adjusted gross income," or AGI. Deductions such as the standard or itemized ones happen "below the line."

So once you've arrived at your AGI, you'll subtract your deductions and exemptions. You get one exemption for yourself and one each for your spouse (if you're filing jointly) and/or dependents. For 2014, the standard deduction for single people and married folks filing separately is $6,200. For married-filing-jointly people, it's $12,400, and for heads of households, $9,100. The personal exemption is set at $3,950 for 2014 (and it is phased out for high-income taxpayers). The end result you get is your "taxable income."

Thus, in order to use the itemized deduction option, you'll need your total deductions to surpass $6,200. This is easier to manage for some people than for others.

The items in an itemized deduction
So what expenses qualify as itemized deductions? Below are some key categories, with a few words about each. (The IRS offers more details.) Note that in some categories, you can only deduct the amount that exceeds a certain percentage, or "threshold," of your AGI.

Medical and dental expenses
This category has an AGI threshold of 10%, so you'll total your qualifying expenses, and then you can only deduct the amount that's above 10% of your AGI. For example, if your AGI totals $50,000, then you can only deduct the amount beyond $5,000. So if you have $6,000 of qualifying expenses, you can deduct $1,000. (This threshold used to be 7.5%, and through 2016, if you and/or your spouse are at least 65 years old, you can use a 7.5% threshold.) The kinds of expenses that qualify here include fees paid to medical practitioners and payments for hospitalization, inpatient care, prescribed drugs, dentures, glasses, hearing aids, wheelchairs, and more.

Source: Flickr user JD Hancock.

Deductible taxes
You can generally deduct non-business taxes that were imposed on you that you paid during the tax year. These include four key types:

  • State, local, and foreign income taxes
  • State and local general sales taxes
  • State, local, and foreign real estate taxes
  • State and local personal property taxes

Our friends at the IRS note, "You can elect to deduct state and local general sales taxes instead of state and local income taxes, but you cannot deduct both." This is helpful, as some states levy their own income taxes, while others rely more on sales taxes for revenue. Meanwhile, though, your property taxes, which can be considerable, are eligible.

Home mortgage points
You may be able to deduct the "points" you paid if you bought or refinanced a home during the year.

Interest expenses
You can deduct home mortgage interest you paid during the year, as well as any interest paid on any home equity loan.

Charitable contributions
You can deduct all the cash charitable contributions you made (this includes payments by check or credit card), though some limits apply. For example, cash contributions surpassing 50% of your AGI are carried over to the following year, as are non-cash contributions exceeding 30% of your AGI. You will need written receipts for contributions of $250 or more.

Casualty, disaster, and theft losses
The value of a loss you sustain due to theft or casualty is deductible only to the extent that it exceeds 10% of your AGI. (Don't try to be clever by claiming the loss on your taxes and then collecting a reimbursement later, as the IRS will view that reimbursement as income to you.)

Non-reimbursed employee business expenses
You can also deduct expenses related to your job that were not reimbursed by your employer. These can include the business use of your home and/or car, business travel expenses, and business entertainment expenses. Examples might include protective clothing, professional association dues, and even tax preparation fees. This category has a 2% AGI threshold.

Read up on possible itemized deductions, as there are even more that can qualify, such as gambling losses and educational expenses that are related to your current job.

Which deduction is right for you?
The first thing to know when it comes to deciding between the standard vs. itemized deduction is that you may not have a choice. The standard deduction is not allowed for the following taxpayers:

  • Those who are married filing separately and whose spouse itemizes deductions
  • Those who file a tax return for a period that spans less than a full year due to a change in how their accounting method recognizes a year
  • Those who are non-resident aliens or dual-status aliens at some point during the year

Note that if your AGI is steep (topping $250,000 for singles and $300,000 for married folks filing jointly, for example), the itemized deduction that you're allowed to take may be reduced or eliminated.

If all that doesn't apply to you, as it doesn't apply to most of us, then you can go ahead and consider using the itemized deduction. Crunch the numbers and see whether you come up with a number higher than the standard deduction. Do a little more reading on the deductions that apply to you, as some have important rules, such as requiring additional forms to be submitted.

Remember that you can always consult a tax pro. While tax pros might cost more than you'd like, they can often save you considerably more than they cost.

Strategizing to lower your taxes
If you decide to go the itemized deduction route or simply want to, the bunching strategy might prove helpful.

If you pull together as many deductions in one year as you can, including some that might otherwise have applied to the following year, that can get you over the necessary thresholds. For example, remember that you can deduct property and state income taxes. Thus, if you're planning to pay a chunk of those in January, you might pay early, as payments made before the end of the year count, even if they apply to the following year. Also, if you have some upcoming medical expenses, such as a new hearing aid or surgery, you might want to time them strategically. Charitable contributions, too, might be moved up a few months. By bunching, you might be able to qualify for an itemized deduction every other year while taking the standard deduction in the intervening years.

Whatever you do, don't take this decision lightly, as it can lower your taxes.