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Standard Versus Itemized Deductions

by Henry Savage

Okay folks, last week I answered a question in general from a reader who was inquiring about the tax advantages of homeownership. Being a mortgage expert and not a tax pro, I explained that real estate taxes and mortgage interest paid in a tax year could be deducted from a homeowner's income before income tax is calculated -- and stopped there.

Well, I got clobbered by several astute readers who accurately pointed out that I did not explain that taxpayers can choose the standard deduction in lieu of itemized deductions. After speaking with a few tax experts, let me attempt once again to summarize these issues.

First, every American taxpayer must choose to either itemize or take a standard deduction when filing his tax return. Itemizing will allow the borrower to deduct several expenses from his adjusted gross income before calculating the income tax owed. In most cases, but not all, the most significant itemized deductions are mortgage interest, real estate taxes, state income taxes, personal property taxes, and charitable contributions.

If a taxpayer chooses not to itemize, he receives a standard deduction. In 2000, the standard deduction for a single person was $4,400. The standard deduction for a married couple filing jointly was $7,350.

"Most taxpayers," says the IRS, "have a choice of either taking a standard deduction or itemizing their deductions. The standard deduction is a dollar amount that reduces the amount of income on which you are taxed. It is a benefit that eliminates the need for many taxpayers to itemize actual deductions, such as medical expenses, charitable contributions, and taxes, on Schedule A of Form 1040. The standard deduction is higher for taxpayers who are 65 or older or blind. If you have a choice, you should use the method that gives you the lower tax."

The subject being taxes, however, nothing is quite simple or direct.

It might seem as though a "standard" deduction is, well, standard and what most renters would use, but there are cases where the standard deduction may not be available to all taxpayers, says the IRS.

You are married and filing a separate return, and your spouse itemizes deductions,
You are filing a tax return for a short tax year because of a change in your annual accounting period, or
You are a nonresident or dual-status alien during the year. You are considered a dual-status alien if you were both a nonresident and resident alien during the year.

The bottom line here is apparent: Depending on whether you file singularly or jointly, your income, and where you fit in the tax system, you must determine whether or not your itemized deductions will give you a bigger write-off than the standard deduction.

For homeowners who hold mortgages, itemizing deductions will almost always offer the best results. The interest paid, for example, on a small 30-year mortgage of $100,000 at 7 percent will run between $6,000 and $7,000 annually in the early years of the loan. Add real estate taxes plus other allowable deductions and the taxpayer's total itemized deductions in this example are sure to be more than $7,350.

In addition to annual write-offs, consumers should also be aware that other write-offs may result from closing and moving in the first year of ownership.

For details and information which relates directly to your situation, please see a tax professional such as a CPA, enrolled agent, or tax attorney. Also, general information is available directly from the IRS at its web site.

For more articles by Henry Savage, please press here.

Published: October 3, 2001

Use of this article without permission is a violation of federal copyright laws.

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, the president of PMC Mortgage Corporation in Alexandria, VA, is a mortgage columnist whose work has appeared in numerous consumer, real estate, and mortgage publications. Mr. Savage welcomes your questions for possible use in this column, however because of the volume of mail received, Mr. Savage cannot answer questions individually.

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