The standard deduction is a dollar amount specified by the Internal Revenue Service (IRS) that most taxpayers are allowed to subtract from their Adjusted Gross Income (AGI). The amount of the deduction allowed is based on the following: taxpayer’s filing status, whether the taxpayer is 65 or older and/or blind, and whether the taxpayer can be claimed as an exemption on another taxpayer’s return. The amount of the standard deduction is adjusted each year for inflation. Most taxpayers have a choice of taking the standard or itemized deduction and would normally choose the one that are more beneficial to them. However, some taxpayers are not eligible to take the standard and must itemize. The following taxpayer must itemize: taxpayers who are Married Filing Separately (MFS) and their spouse itemizes; taxpayers who had a change in annual accounting period; and nonresident or dual-status alien during the year. More taxpayers are using the standard deduction today than in the past. The standard deduction has increased tremendously over the past years, eliminating the need for a taxpayer to itemize. Also, since some expenses (finance charges) that was allowed as itemize expenses can no longer be claimed, most taxpayer’s allowable standard deduction is more than their actual expenses.
Unlike standard deduction, itemized deduction is a taxpayer’s actual expenses. Expenses such as: medical and dental expenses, state and local taxes paid, interest and taxes paid on home, unreimbursed employee expenses and/or other work-related expenses, uninsured casualty or theft losses, and contribution to qualified charities, are allowable deductions with certain limitations. Unlike taxpayers who take the standard deduction, taxpayers who itemize deduction must use Form 1040 and attach Schedule A. Both the itemized and the standard deductions are subtracted from taxpayer AGI. As stated above, some taxpayer do not have a choice and must itemize.
Taxpayers who itemized their deductions are more likely to be audited than those that take the standard deduction. However, they should not let the fear of an audit deter them from itemizing if they have legitimate expenses and can benefit by itemizing. Taxpayers need to keep all receipts and records to support any expenses claimed. The receipts and records should be kept until the period of limitation runs out on the return. See what receipts and records to keep and how long to keep records at – http://www.irs.gov/publications/p17/ch01.html#en_US_publink100032040.