What is the difference between a standard deduction and itemizing on your individual tax return?
The IRS allows for a standard deduction without having to prove any expenses. This standard deduction varies depending on the filing status chosen on the tax return. For single taxpayers and those married filing separately, the standard deduction for 2012 is $5,950. Married filing jointly the standard deduction is $11,900. The standard deduction is $8,700 for taxpayers qualifying for head of household status.
Taxpayers without taxes paid to the state, mortgage interest, charitable donations, medical expenses and other itemized expenses usually take the standard deduction.
When taking the standard deduction, any state refund received from the previous year does not have to be included in income on the next year’s tax return. However, if the taxpayer itemizes, state refunds must be included as income. This confuses some taxpayers as they feel they are being double taxed.
When including taxes paid to the state on Schedule A, the deduction is based on the actual amount of taxes paid to the state. If the amount of taxes paid to the state results in an overpayment, a refund is made. Therefore, the amount claimed on Schedule A for state taxes paid does not reflect the amount refunded from the state and is considered income received to the taxpayer.
This concept is similar to a rebate given on a product you purchase. The original cost may have been $100, but if there is a rebate of $10, the amount actually paid is $90.
To add to the confusion, when you itemize on Schedule A and take the deduction for taxes paid to the state, the amount included as a deduction on the Schedule A is recorded as an addition to income on the state tax return. This amount is added back into the itemized amount before figuring the amount of the state tax liability.
Itemizing the deductions on Schedule A is beneficial only if the amount itemized exceeds the standard deduction. In addition, good record-keeping is required to qualify all the deductions taken that exceed the IRS standard deduction.
For more information, visit www.irs.gov and type Schedule A in the search engine.
Tracy Bunner is an enrolled agent and tax preparer with an office in Harrisville. She can be reached at 801-686-1995 or at tracystaxservice@yahoo.com
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