Standard and Itemized Deductions 1

1040 Page 2 2

Standard Deduction A set dollar amount based on filing status that is subtracted from taxpayers income. o Lowers tax liability o Important to choose the correct filing status 3 Filing StatusStandard Deduction 2014 Single$6,200 Married Filing Separately$6,200 Head of Household$9,100 Married Filing Jointly$12,400 Qualified Widow(er)$12,400

Itemized Deduction A taxpayer may use eligible expenses in place of the standard deduction to lower their taxable income and possibly their tax liability. Taxpayers will take the greater of their itemized expenses or the standard deduction State and local tax refunds become taxable income for the following tax year. If MFS, both parties must agree to both take the standard deduction or both take itemized deductions 4

Intake and Interview Form 5

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Medical Expenses Can claim amount that exceeds o 10% of AGI or o 7.5% if over 65 years old Includes: o Doctor, dentist, vision, prescriptions, hospital, mileage to the doctor for sickness/checkups, long term care insurance, etc. o Allowable expenses for: Taxpayer and Spouse Dependents claimed on the return dependents they would have claimed except for income higher than $3900 or because of rules for children of divorced or separated parents Excludes: o Non-prescription drugs, elective surgery costs, diet food, weight loss program (unless prescribed by doctor), etc. 7

Schedule A Detail 8

Taxes Includes: o State and Local Taxes, Real estate taxes paid, personal property tax Excludes: o License fees for cars, Services that are included in Real estate taxes paid (i.e. sewer, trash pickup) Tip: o Any local and state tax refunds received when a person itemizes, must be claimed as income in the following tax year since it was taken as a deduction. 9

Interest Paid Includes: o Mortgage Interest on 1st and 2nd home, Points paid when mortgage taken out, mortgage insurance premiums - all will be shown on 1099 statement from bank Excludes: o credit card, pay day loan interest paid 10

Schedule A Continued 11

Gifts to Charity Includes: o Cash, Non-Cash donations (up to $500) o Volunteer mileage or gas, parking, tolls, required uniform expenses (need receipts) Need receipts to show donations Non-cash donations of $500 or higher are out of scope o Refer to a professional 12

Miscellaneous Expenses Includes: o Employee expenses (union dues, uniforms, etc), Tax preparation fees paid in previous year, Investment expenses including cost of safe deposit box for investment storage, financial publications, gambling losses, etc Form 2106 may be needed for employee expenses First 2% of AGI expenses are excluded 13

Exercise $1,259 in out of pocket medical paid $1,120 in real estate taxes $2,003 in mortgage interest paid $1,800 paid to their church $200 in gambling losses $178 local tax paid $ state tax paid The taxpayer will file single and has an AGI of $17,850. $850 of that is gambling winnings. Should they itemize or take the standard deduction? 14

Tips for Itemizing Walk through the exercise if client has several of the eligible expenses o sometimes some expenses like local taxes and state taxes paid are overlooked to push the taxpayer over standard amount Some medical expenses carry over to the state return to benefit the taxpayer o Include all medical even if it doesn’t meet the 10% or 7.5% rules. Publication 4012 has detailed charts for walking through itemizing as a helpful reminder 15