Wednesday, February 5, 2003

CPAs urge you to examine itemizing this year's tax return

Each year, when you file your income tax return, you can choose between itemizing or claiming the standard deduction. Itemizing allows you to deduct your actual allowable expenses while the standard deduction provides a flat amount to be deducted from your adjusted gross income.

According to the Georgia Society of CPAs, a large percentage of taxpayers may be paying more in taxes than they need to because they take the standard deduction. Here's how to ensure you're not one of them.

The only sure way to determine which method saves the most tax dollars is to run the numbers. Use Schedule A to list all your deductible expenses and compare the total to the standard deduction for your filing status. If your actual itemized expenses exceed the standard deduction, you'll save money by itemizing.

For 2002, the standard deduction is $4,700 for single filers, $7,850 for married filing jointly, and $6,900 for heads of household. If you're over age 65 at the end of the tax year or legally blind, you're entitled to an additional standard deduction ranging between $900 and $1,150, depending on your filing status.

It's important to understand which expenses you can itemize. Some of the more common deductible expenses include:

Home mortgage interest expense on up to $1 million in home acquisition debt and $100,000 in home equity debt.

State and local income and property taxes.

Charitable contributions to qualified organizations. Gifts of $250 or more require a statement from the charitable organization showing the amount contributed and whether you received any goods or services in return. Keep in mind that a canceled check is not sufficient proof.

Medical expenses exceeding 7.5 percent of your adjusted gross income (AGI). Examples of deductible medical expenses include fees for doctors, dentists, chiropractors; insurance premiums for medical and dental insurance; prescription medications; hospital care; X-ray and laboratory services; and other related costs.

Miscellaneous expenses exceeding two percent of your AGI. This category includes unreimbursed employee business expenses, investment expenses, and tax preparation fees, among others.

Casualty and theft losses are deductible in the year the loss took place. Uninsured losses caused by theft, vandalism, fire, storm, or similar causes are deductible only if you itemize and only to the extent they exceed 10 percent of your AGI. The first $100 in losses for each event is nondeductible.

If you tallied all qualified expenses and came up short for 2002, don't assume you can't itemize in future years. Consider the strategy of alternating between taking the standard deduction one year and "bunching" deductible expenses into the year you itemize.

Bunching refers to the process of timing your expenses so that they are higher in one year and lower the following.

The easiest deductions to juggle between tax years are charitable contributions, state and local income and property taxes, and your January home mortgage payment.

For example, you could double up on your charitable contributions and make them every other year rather than annually. In the year you decide to itemize, you can make your January mortgage payment in December to boost your mortgage interest expense. You should also try bunching deductions subject to AGI-based limits like medical and dental expenses and miscellaneous itemized deductions. Timing elective medical procedures, such as braces and laser eye surgery, is a common way to qualify for the deduction.

Be aware that if your AGI exceeds certain amounts, your total allowable itemized deductions may be reduced.

For 2002, itemized deductions decrease by three percent of the amount your AGI exceeds $137,300 for single and joint taxpayers ($68,650 for married filing separately).

This reduction cannot exceed 80 percent of total itemized deductions and excludes deductions for medical expenses, casualty and theft losses, and investment interest expenses.

What if you discover you could have saved money by itemizing? If you are willing to recalculate your taxes, you can file an amended return.

Form 1040X will let you negate your original standard deduction and, in its place, list all the money-saving deductions you should have taken. Just be sure you still have the paperwork and receipts to substantiate your deductions in the event of an audit. Generally, tax returns must be amended within three years of the original filing deadline. A CPA can help you correct your past returns and provide you with additional strategies for timing your deductions to maximize your tax savings.

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