Should I Itemize Deductions this Year?

Ever wonder what the actual effect of a charitable deduction really has on your taxes? Does it really make a difference? When and how?

You might wonder what that has to do with itemized deductions. Well everything actually. While charities like to advertise the tax deduction benefit to incentivize you, this benefit only applies in certain cases. It only decreases your tax liability when you're itemizing your taxes.

Charitable deductions are one of many items you can deduct if you choose to itemize. However, for most people the standard deduction will end up being higher. Before you make any decisions it’s good to know what the actual standard deduction is.

2011 Standard Deduction:
· Married, Filing Jointly: $11,600
· Head of Household: $8,500
· Single: $5,800
· Married, Filing Separately: $5,800
· Blind or over 65 and married: $12,750
· Blind or over 65 and single: $7,250

As you can see these deductions are pretty high and unless you've been tracking your expenses all year or had a major expense, you will be better off taking the standard. So now lets look at the two major reasons you should consider itemizing:

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1. High Medical Costs
Medical expenses are tricky. The problem here is that not all expenses count and you can’t deduct dollar for dollar. Medical expenses you can deduct include: insurance premiums, prescription drugs, and treatments that are not covered under insurance. Secondly, you can only deduct expenses that exceed 7.5% of your AGI. That means, for example, if your AGI is $40,000, your “7.5% limit” is $3000. Once you add your expenses, you need to subtract $3000 and that’s how much you can actually deduct. Check the IRS website for a more detailed explanation of both requirements.

2. Mortgage Interest
The home mortgage interest deduction is a lot simpler to figure out. Basically, if you pay interest on “loans to buy a home, home equity lines of credit, or construction loans,” you are legally liable, and it’s only on your main home and a second home you can deduct the interest paid (Taxes, William Perez).

Very rarely will it be worth it to itemize if you do not have one of these two expenses, but here is a good list of deductions you can include.

TIP: if you realize you have enough deductions and you wan't to itemize, start gathering your documents and remember to keep track of your expenses for next year!