Income Tax Fundamentals and Calculations - Standard / Itemized Deductions
Generally, a taxpayer can claim the standard deduction (fixed amount) or itemize their deductions (total your actual expenses on Schedule A) and subtract this amount from their adjusted gross income (AGI) to determine their taxable income.
For taxpayers who elect not to itemize their deductions, a standard deduction amount is available for all taxpayers. For 2014, the standard deduction amounts are as follows:
Married Filing Joint Returns and Surviving Spouses - $12,400
Heads of Households - $9,100
Single Individuals (other than Surviving Spouses and Heads of Households) – $6,200
Married Filing Separate Returns – $6,200
For 2014, the standard deduction amount for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of:
(1) $1,000 or
(2) the sum of $350 and the individual's earned income.
The additional standard deduction amount for the aged or the blind is $1,200. These amounts are increased to $1,550 if the individual is also unmarried and not a surviving spouse.
*NOTE*- If you are married filing separately and your spouse itemizes deductions, you must also itemized your deductions, regardless if the standard deduction is higher.
If your actual expenses incurred exceed the standard deduction, it normally makes sense to itemize your deductions (using Schedule A to compute) to substantiate a higher deduction from adjusted gross income to reduce your taxable income.
These are the common itemized deductions:
- Medical expenses – In excess of 7.5% of AGI
- Mortgage interest expenses – Qualified residence interest (primary and one other residence)
- State and local income tax – State and local income taxes in the year paid, foreign income tax is a credit deduction
- Charitable contributions – All public charitable contributions (up to 50% of AGI) and private foundation charitable contributions (up to 30% of AGI)
- Real estate taxes – State, local and foreign real estate taxes
- Casualty and theft losses – Identifiable event and/or property damage results, when event is sudden, unusual and unexpected.
- Personal property taxes – State and local personal property taxes
- Investment interest – Limited to net investment income
- Miscellaneous expenses – Subject to 2% of AGI floor: job search costs, uniforms, professional dues, hobby expanses, work tools, expenses to collect income. Not subject to 2% AGI floor: gambling losses, amortizable premium on taxable bonds, federal estate tax in respect to a decedent, unrecovered investment in annuity contract.
The Limitation on Itemized Deductions, known as "Pease" (after the Congressman Pease), reduces most itemized deductions by 3% of the amount by which AGI exceeds a specified threshold, up to a maximum reduction of 80% of itemized deductions. For 2014, the AGI thresholds are $254,200 for single filers, $305,050 for married filing joint, and $279,650 for head of household.
Personal and Dependency Exemptions
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