Tax 2005: Deductions

We will provide tips on Tax 2005 starting with today's posting. Today's topic is 'Deduction'. As many of us know there are two methods of taking deductions: (i) Standard Deduction (ii) Itemizing.

According to the Internal Revenue Service, most taxpayers use the standard deduction. The amount is different for each filing status and is higher for blind taxpayers and those age 65 or older. The amounts are also adjusted for inflation every year. For 2005 returns the standard deductions are:

• $5,000 for single filers or married couples filing separately
• $7,300 for head of household filers
• $10,000 for married couples filing jointly

But those who spend a lot on medical care, mortgage interest, state and local taxes, charitable contributions or a variety of miscellaneous items generally are better off itemizing. Even purchases might help out some filers at tax time this year, thanks to a new deduction for sales taxes paid. When these expenditures exceed the standard deduction, you'll save on your taxes by filling out Schedule A along with your 1040.

If you itemize, there are a few things to remember. First, not every dollar you spend can be subtracted from your income. In the medical category, only expenses that exceed 7.5% of your adjusted gross income can be deducted. You cannot deduct any amount below that. You have to reach a '2% of income' threshold before you can use miscellaneous deductions, such as unreimbursed job expenses and investment and tax-preparation costs. There also are restrictions on how much in casualty losses you can deduct, as well as limits on the deductibility of very large charitable contribution amounts. Second, your overall itemized deduction amount for 2005 may be reduced if you make more than $145,950. That amount applies to both single and married joint filers. The earnings limit is $72,975 each for a husband and wife who decide to file separately.