Saturday, February 25, 2012

Standard Deduction vs. Itemized Deduction on Income Tax

I had recently read an article and it mentioned something about taking the "standard deduction" instead of deducting things such as your mortgage interest etc. I'll be the first to admit I don't know much about taxes, but I thought I'd look into this and see if it would be beneficial to go the standard deduction route in the future.

I found out that the standard deduction for a married couple filing jointly is $11,600 for 2011 (check out the Wikipedia page on standard deductions for other filing statuses). At first I was thinking we would for sure be better off taking the standard deduction next year because we would be paying just $8,556 in mortgage interest this year due to getting rid of that second mortgage last year and refinancing our first mortgage. Last year we paid $11,019.

We did this year's taxes with TurboTax, so I figure they would make the decision of whether to go with the standard or itemized deductions for me. I took a look at our return and it did itemized deductions. But I didn't realize how much you could deduct - the largest being state income tax. Other things it deducted were property tax, license plate tabs and gifts to charity. For 2011 our itemized tax deduction was $19,104. I estimate that this year's eligible tax deductions will be about $16,641 assuming everything except the mortgage interest stays the same. We will pay $2,463 less in mortgage interest this year (yay!), but at a 25% tax rate, we will pay an additional $615 in tax this year (boo!). But even with the extra tax, we will be saving a net total of $1,848!

Anyway, getting back to which deduction to take, with a estimated $16,641 in tax deductions available in 2012, it looks like we will continue to do the itemized deductions until the itemized gets below the standard deduction of $11,600 (or whatever it is in the future because it generally increases slightly each year).

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