Standard Deduction VS. Itemized Deduction

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VINNY
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Standard Deduction VS. Itemized Deduction

Post by VINNY »

I have 5 exemptions I can claim on my 2007 return, my 3 kids, my wife and I which total 17,000.00 for 2007's return.

1. Is it correct to state that as long as the "Standard Deduction" ($10,700.00 for 2007) does not exceed my personal exemptions, I will and should itemize my tax return since my personal exemption deduction will be greater than my standard deduction.

2. We contributed 31,000 to our 403b/457 for 2007. Mortgage Interest for 2007 was 5,000.00. Without factoring any other deductions and using gross income of 100,000.00 I have already reduced by taxable income to 64,000.00, correct?

Thanks for the help...
gassert
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Post by gassert »

Exemptions are completely different and independent of Deductions. You get the exemptions no matter what. End of story. You then either itemize deductions or take the standard deduction. Itemizations are most typically charitable gifts, mortgage interest, and state tax.

If you have been using exemptions as your deductions in the past, then you may need to look at your past returns and refile.
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bottlecap
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Post by bottlecap »

Vinny:

I'm not a tax expert, but I do prepare my own taxes. I think you are confusing "exemptions" with "deductions," although they have a similar effect - that is, to reduce your taxable income. You may take both exemptions and deductions. That said:

1. You get typically get the "exemptions" (which I assume is the $17,000 figure) anyway. A separate determination is whether you should itemize "deductions" or not. If your itemized deductions exceed the standard deduction, you should itemize.

2. $31,000 of income will not show up as taxable wages because of the 403b contributions. So your taxable income will roughly be (assuming no dividends, capital gains, or other income): $100,000 - $31,000 (403b contr.) - $17,000 (exemptions) - deductions (either standard or itemized). So I guess your taxable income will be about $52,000 less whatever deduction(s) you take.

If you do not itemize your deductions, your mortgage interest will not count. You can't itemize deductions and take the standard deduction.

Hope this helps!

JT
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VINNY
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Post by VINNY »

Thanks for clearing that up. I did not know that personal exemptions and whether you itemized or took the standard deduction, were two seperate matters. I now know from your responses that whether you take the standard deuction vs. itemizing, depends on if your itemized deductions exceed the standard deduction. The personal exemptions then come into play secondly, and they then further reduce taxable income....right?

Lastly, if I take the standard deduction will I lose the ability to claim stock losses up to the 3,000 allowed amount. I sold my entire stock portfolio 2 years ago and I have a total of 12,000.00 in losses I was going to 3,000 annually but if I take the standard deduction, I wont be able to I am guessing....
sport
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Post by sport »

Vinny,
Capital gains and losses are completely different and separate from itemized or standard deductions. Capital gains/losses are shown on schedule D. Itemized deductions are shown on another schedule (Schedule B if I remember correctly). Just a suggestion: Get a copy of a 1040 long form. It doesn't matter much which year. Go through the form line by line. This should take you about 15 or 20 minutes. You will see how exemptions, deductions, captial gains, and everything else applies to your tax calculation. It really is not all that complex. You just go through it one line at a time.

Best wishes,
Jeff
plake15
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Post by plake15 »

exemptions as your deductions in the past, then you may need to look at your past returns and refile.

You have been using exemptions as deductions in the past? ----uh-oh..
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soaring
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Post by soaring »

If you are with Vanguard on-line go to Turbo-tax and complete the requested information. It will tell you which is best under your circumstances if standard deduction or itimized deduction are best in your case. Yes, it will take a few hours to gather all the information needed and complete the forms.

If you don't want to use the on-line version go buy Turbo-Tax basic is that meets your needs and do the same on your computer.

Not only will you be better informed about your tax situation but it will prepare you for future use of tax software and likely you can do it yourself each year.

good luck
Gene
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bottlecap
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Post by bottlecap »

Vinny:

I second Jeff's response. I think you can still take the cap gains loss. The best thing to do is simply prepare your taxes based on the info you have now. The instructions aren't exactly clear, but eventually, you'll figure it out. You will then be prepared when you have the final info.

JT
gassert
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Post by gassert »

Vinny

Forget doing it on the cheap - you need to pay someone ASAP to do your taxes. DYI can come back to cause you prob;ems if you dont have a basic understanding.
sscritic
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Post by sscritic »

Even if you do hire someone to do your taxes, you won't learn if you don't get your own hands dirty.

Get your forms and instructions from your library. If you go through step-by-step, you will encounter deductions, exemptions, and capital gains. You will see how they go in different places.

Exemptions are counted on lines 6a, 6b, 6c, and 6d of Form 1040. The deduction for your exemptions goes on line 42. The larger of your standard deduction and itemized deduction goes on line 40. You compute your itemized deduction on Schedule A. You compute your capital gains on Schedule D. (etc.)

Try it, you'll like it! It's the only way to learn. Use a tax program only after doing the steps by hand. The program might fix your arithmetic errors, but doing your own taxes with a pencil and a calculator is a much better way to learn.

Don't forget you have until April 15. You don't have to hire someone tomorrow. You probably don't even have all your 1099s yet.
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fishnskiguy
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Post by fishnskiguy »

I wholeheartedly agree with sscritic.

You will never understand the tax code and be able to make smart decisions about the future unless you roll up your sleeves and do your own returns with tax form and pencil.

After you do it yourself, go to a tax prep business and let them do it again.
Then force them to show where and why your prep and theirs differ. It will be worth a bunch.

Chris
Trident D-5 SLBM- "When you care enough to send the very best."
tomd37
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Do It Yourself First, then get it done by expert

Post by tomd37 »

Vinny,

I like the proposal of doing it yourself to learn more about taxes. Then, before sending the return to the IRS, have someone else prepare your return and question any differences.

There are a couple of free tax preparation services depending on your age or income. One is Volunteer Income Tax Assistance (VITA) for low to moderate income people of any age level. The other is Tax Counseling for the Elderly (TCE) sponsored by the AARP Foundation which is similar to VITA but targeted to seniors 60 and over without regard to income.

Based on your income there are free filing systems available through the IRS. Check those out at www.irs.gov.
Tom D.
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VINNY
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Post by VINNY »

Thanks for the feedback...

I have an individual who does my taxes and I was just trying to crunch some numbers to estimate if I would owe or get a refund for 2007. I agree, I want to learn more and I will try to do my own taxes and compare them to my preparer's. He has been doing my taxes for the past 13 years.

You guys really threw me for a loop. I really believed that if you took the standard deduction you completed a 1040EZ you could not attach any other schedules. I thought that those various schedules such as D could only be completed if you itemized. So a filer can complete a 1040EZ and still attach a schedule D if they had losses or gains?

In my own situation I have the following deductions:
Mortgage Interest $4796.00
Real Estate Taxes $4013.00
Union Dues $430.00
Job Related Expenses(his and hers) $1,000.00
IRA custodial fees (Dodge and Cox) $25.00
Charitable Contributions $500.00

My deductions amount to approximately $10,764.00 slightly higher than the standard deduction. If I were to just take the standard deduction and complete 1040EZ, I can still attach a Schedule D to my 1040EZ right? Or am I all wet behind the ears and not making a lick of sense?
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grabiner
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Post by grabiner »

VINNY wrote:You guys really threw me for a loop. I really believed that if you took the standard deduction you completed a 1040EZ you could not attach any other schedules. I thought that those various schedules such as D could only be completed if you itemized. So a filer can complete a 1040EZ and still attach a schedule D if they had losses or gains?
You can only use 1040EZ or 1040A if your return is simple enough to be covered by these forms; anyone can file Form 1040. If you have capital gains, you must use Form 1040 because you have to report them on Schedule D in order to pay the right amount of tax.

You can take either a standard deduction or itemized deductions on Form 1040; if you take itemized deductions, you file Schedule A to determine how much they are.
My deductions amount to approximately $10,764.00 slightly higher than the standard deduction.
Fill out the Schedule A to check. Miscellaneous deductions such as job expenses and IRA fees are deductible only to the extent that they exceed 2% of your adjusted gross income, so you may have less in deductions than you expect. It doesn't cost anything to fill out a Schedule A for yourself and then not file it with your tax return because the standard deduction is larger.
Wiki David Grabiner
Topic Author
VINNY
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Post by VINNY »

Thanks Dave, I'm looking at it now....
Topic Author
VINNY
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Post by VINNY »

Dave,

This is from Kiplinger's...

IRA custodial fees. IRA trustee or custodial fees that you pay directly out of your own pocket qualify as a miscellaneous itemized expense deductible to the extent that it and your other miscellaneous deductions exceed 2% of your adjusted gross income. If the fee is debited from your IRA, the amount cannot be deducted.[/b

Do you know why it matters whether you write a check or have the fund company deduct it???
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Christine_NM
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Post by Christine_NM »

Vinny -

Looks like you are on the right track now. You will need Form 1040, Schedule A (itemized deductions), probably Schedule B (interest and dividends), and Schedule D to report your capital losses.

Here's the procedure I've been using for many years:

Fill out Schedules A, B, and D.

Use the line item instructions in the 1040 booklet as a guide to enter the totals from Schedules B and D on the front of 1040 along with other income sources to compute your adjusted gross income (AGI). Don't enter amounts without reading instructions!

On the back of 1040 you then reduce the AGI by the itemized deductions from Schedule A. Then you reduce the result by your personal exemptions.

Next you figure your tax. Do the AMT worksheet to see if you need to pay Alternative Minimum Tax. If not, if you have qualified dividends you have to use a horrible worksheet (Qualified Dividends Cap Gains Worksheet), otherwise you can just look the amount up in the Tax Table section.

Then you enter how much tax you've paid from various sources or had withheld.

Subtract tax paid from tax due. If positive, you owe money. If negative, you get a refund.

Here's the important part: put this work away for 1 week. Don't look at it.

After a week, pull it out and go over every line with fresh eyes. If you don't find errors be a little worried. Think really hard about whether you included all income, deductions, and payments. Put it away for another week.

After a week or two, review it again. When you think it's right, and you're sure you've read all the instructions that apply, sign the return. Attach the address label. Make sure your name and SSN are at the top of each page. Collate the forms according to their Attachment Sequence Order Number.

Make several photocopies of all forms. Mail to correct office, being sure to include the 1040 with the original signature, not a photocopy.

Don't be surprised if you get some sort of correction from the IRS. Their corrections are usually right, but not always. If you have to call in response to a correction, don't use the 800 number. Hopefully person's name and toll number will be attached included on the form. Call that person, who will understand your return and who will pick up phone on first ring (in my experience).

Lately the worksheets you have to fill out to figure the correct amounts to enter on 1040 lines have gotten more complex. I've always done my own returns, but if I were starting now I think I'd use a CPA as a double check for a couple of years.
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VINNY
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Post by VINNY »

Thank You Christine! :D
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Christine_NM
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Post by Christine_NM »

Question: Do you know why it matters whether you write a check or have the fund company deduct it???

Possible Answer: If you write a check, the fee is paid with regular taxable money, so you get a deduction.

If you got a deduction when the fee was paid by IRA funds, you'd be getting credit for spending money you can't spend yet. When the company just confiscates the fee from the IRA, it doesn't count because that money isn't available for "spending" until you are 59 1/2.

Hope that makes sense.
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