Get the Most out of Itemizing on Taxes

Itemizing is an incredibly easy concept to understand, but the strategies behind it can be complex and myriad. The rule for when to itemize is simple -- you do it if the total of your itemized deductions is greater than your standard deduction.

Your tax is based on your "taxable income." That's your total income after you've subtracted above-the-line deductions like your Individual Retirement Account or other qualified retirement-plan contributions, moving expenses or alimony payments, plus your personal exemption and either:

Your standard deduction or your itemized deductions.

Your itemized deductions are sometimes referred to as "below-the-line" deductions. (Your "adjusted gross income" is "the line.") Clearly, the more you can deduct, the less in tax you have to pay. Some taxpayers must itemize, even if their deductions are less than the standard deduction. You must itemize your deductions if:

You are married, filing separately, and your spouse itemizes.
You are a U.S. citizen who can exclude income from U.S. possessions.
You are a nonresident or dual-status alien.
You file a short-period return because of a change in your accounting period.

There are five main categories of itemized expenses that you can deduct on your taxes:

Medical and dental expenses.

Taxes. These include state and local income taxes, property taxes on real estate, intangible taxes (on the value of stocks and bonds you own) and on personal property taxes on such things as cars. In 2006 and 2007, as in 2005, you can deduct either your state income taxes or your state sales taxes but NOT both.

Interest expenses. For most people, these are limited to home mortgage interest, points (interest that's prepaid to buy a home), and some interest on investments and education expenses. For most taxpayers, the mortgage deduction is what lets them itemize.

Charitable contributions

Casualty and theft losses.

The key, then, is to maximize the value of your itemized deductions. Here's where planning can put dollars in your pocket.

Dealing with the floors

Some itemized deductions -- including medical expenses or miscellaneous deductions such as investment expenses, safe deposit fees, professional education, employee job-hunting expenses and tax-preparation fees -- are not allowed until they exceed a certain "floor" amount.

The toughest floor to exceed is medical expenses. No medical expenses are allowed as itemized deductions except for the amount that exceeds 7.5% of your adjusted gross income. That means if you have an adjusted gross income of $100,000, the first $7,500 of your medical expenses doesn't count.

Miscellaneous itemized expenses are also deductible only after they exceed a minimum floor. In this case, it's 2% of your adjusted gross income. So, with an adjusted gross income of $100,000, your first $2,000 of miscellaneous itemized deductions won't count.

But here again, many of these deductions can be either accelerated or deferred. Miscellaneous itemized deductions such as those mentioned above often can be paid in the year of your choice.

The rule here is the same as with medical expenses. First, qualify the expenses to be included in the deductible pot. Then, only if you expect to itemize, accelerate. If not, defer.

One should consult with a qualified taxation professional prior to implementing any taxation strategies.

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