When you fill out your tax return for 2010, you’ll have to choose whether to itemize deductions or claim a standard deduction. If you itemize, you’ll deduct certain amounts you spent this year on charitable donations, mortgage interest, and so on. You may, instead, claim a standard deduction. For 2010, the standard deduction is $11,400 for married couples filing a joint return; 5,700 for singles and married individuals filing separately; and $8,400 for heads of household. Taxpayers who are over age 65 receive an additional standard deduction: $1,400 for single taxpayers and $1,100 apiece for married taxpayers in 2010. Similar deductions are available to the blind. If you qualify on both counts, you’ll get two deductions.

Possible tax break

For 2010, you may need to consider another possibility when you decide whether to itemize or take the standard deduction. In previous years, homeowners could deduct up to $500 of property tax paid, in addition to their standard deduction (married couples could deduct up to $1,000). This tax break expired afrer 2009, but Congress is considering a bill to extend it into 2010, as of this writing. Regardless of how Congress acts on this issue, if you itemize deductions instead of taking the standard deduction, you generally can deduct all the property tax you pay.

Making the choice

As year-end nears, you can determine whether you will be better off itemizing or taking the standard deduction this year. If you think you’ll take the standard deduction, you may want to defer itemized deductions until 2011, when you might get a tax benefit. Example 1:Wallace and Diane Franklin are both 66 years old. They own their home without a mortgage and pay $2,000 per year in property tax. The Franklins expect to pay around $4,000 in state income tax this year. They have not had significant unreimbursed medical expenses. So far this year, they have not made substantial charitable contributions. If the Franklins decide to take the standard deduction, their total will be either $13,600 or $14,600, depending on whether the real estate property tax break has been extended.

Standard deduction for all couples filing jointly $11,400

Additional deduction for married people 65 and older $2,200

Special property tax deduction (if available) $1,000

Total $14,600

      If the Franklins decide to itemize, their deductions would include only $4,000 in state income tax and $2,000 in property tax‑$6,000 total. Thus, in this example, they would be much better off taking the standard deduction. Therefore, the Franklins probably should delay their usual year-end charitable contributions until January 2011 because they might save tax in 2011 by itemizing deductions. In contrast, taxpayers whose itemized deductions clearly will top the standard deduction amount generally should incur itemized deductions, such as charitable contributions, in 2010. Some taxpayers who owe the alternative minimum tax (AMT) will save tax by itemizing, even if their standard deduction exceeds their itemized deductions. Our office can help you decide.

Healthier deductions

You can take steps to increase your deductions for 2010, if you decide to itemize rather than take the standard deduction. For instance, you can figure out whether you are likely to deduct medical costs this year. You can deduct such costs only to the extent they exceed 7.5% of your adjusted gross income (AGI). Example 2:Melody Neale expects her AGI this year to be around $100,000. Thus, she’ll be able to deduct health care expenses over $7,500: 7.5% of$100,000. When Melody tallies her medical outlays for the year, she finds she already has spent $10,000, so she is over the threshold. She can go to the dentist, get doctors’ checkups, buy prescription eyeglasses, and so on before December 31 and pay those bills with tax-deductible dollars. On the other hand, suppose Melody’s health care expenses are only $4,000 for the year, through November. She can decide to postpone all elective medical procedures until 2011, when they might lead to tax deductions.

Make the most of miscellany

You should approach miscellaneous itemized deductions in the same manner. Such deductions include outlays for tax preparation, unreimbursed employee business expenses, investment expenses, Roth IRA losses, and 529 college savings plan losses. You add up all of those items and take deductions to the extent they exceed 2% of your AGI. Example 3: Gary Roberts expects his AGI this year to be around $150,000. Therefore, he’ll be able to deduct miscellaneous itemized deductions over $3,000: 2% of $150,000. As of early December, Gary finds that his miscellaneous deductions for 2010 are already at $4,000; thus, further expenses will be deductible. Before year-end, he can pay for investment publications and software with tax-deductible dollars. If Gary closes out his sole Roth IRA and sole 529 account for losses this year, those losses also will be deductible on his 2010 tax return. On the other hand, if Gary has only a few hundred dollars in miscellaneous costs in 2010, he may decide to incur additional miscellaneous costs in 2011, when they might be more valuable. Your strategies for itemized deductions will be different if you are subject to the AMT. Increasingly, moderate and upper income taxpayers owe the AMT in addition to regular tax; our office can tell you if you will pay the AMT this year. Taxpayers who are subject to the AMT can deduct medical costs only to the extent those costs exceed 10% of AGI, rather than 7.5% of AGI. Therefore, your decision on whether to incur elective medical bills by year-end will be based on whether they’ll be greater than 10% of your AGI, not 7.5%. If you are subject to the AMT, you won’t be able to take miscellaneous itemized deductions, no matter how much you spend. Therefore, if you will owe the AMT this year, you shouldn’t close out Roth IRAs or 529 college savings plans at a loss because you won’t get any tax benefit. Instead, wait until next year to see if those tax-favored accounts recover-or if you’ll escape the AMT in 2011 and perhaps be able to deduct miscellaneous expenses. Just as you can’t take miscellaneous itemized deductions for AMT purposes, you-also can’t -deduct state and local tax payments. Taxpayers who itemize deductions may decide to prepay in 2010 any property tax or state and local income tax due in early 2011 to get a current deduction. However, if you will owe the AMT in 2010, you might as well wait until those tax payments are due in early 2011 because you might be able to deduct them on your 2011 return.

2010 Q4 | Year-End Tax Planning for Itemized Deductions