When Choosing b/w the standard deduction and itemizing deductions, what

factors should considered? Can proper planning help a tax payer benefit from
itemizing instead of using standard deduction or vice versa? Explain.

Ans:

Taxpayers have the freedom to elect whether to go with standard deduction or

itemizing their deductions. When taxpayers have a choice, they would use the
type of deduction that results in the lower tax. Prior to this, however, he has to
itemize the deductions and see whether they exceed the standard deduction.
The provision of standard deduction allows taxpayers without a significant
amount of itemized deductions to save a certain minimum amount of income
from tax. Usually for people over 65 years, and/or blind, there is additional
standard deduction.

The second part of the question needs the taxpayer to consider his/her events in
life and personal expenses. However, unless he has a large amount of qualifying
expenses, it is better taking the standard deduction, as most of the taxpayers
do. Since he can decide every year whether he want to take the standard
deduction or itemized deductions, careful tax planning can help him maximize
his deductions in years he chose to itemize. Taxpayer can benefit from itemized
deductions if he has interest on mortgage, for example. If a taxpayer is planning
to buy a house, he can mortgage it and count this item towards reducing his
taxable income. To maximize his deductions, taxpayer can opt to increase his
interest expenses by buying on interest. In case of medical expenditure,
clustering his deductions can maximize the value and allow him to cross a
minimum threshold, for example, he can cluster any of the regular expenses into
the following year to make 10% of AGI in expenses in one year. That would
make 2.5% of those expenses deductible. The year the taxpayer chose to
itemize his deductions, it make sense to cluster his spending for that year in
deductible categories. It gives him the option to make purchases for any items
he has been holding o in that particular year. If he is, for example, already over
the 7.5 percent medical deduction threshold, it makes sense to consider
medical treatments he has been holding o to maximize the eect.

Response 1:

There is a question as to when one should itemize. One obvious condition what
we have discussed so far is when we believe the total of our itemized deductions
might be larger than the standard deduction that we are eligible for, we should go
ahead with itemizing the deductions. In particular however, people who own
homes should always itemize since there is a high probability that they have
gone through property taxes and real estate interest that be greater than the
standard deduction. If we donate to charity on a constant basis and spend a

considerable amount on medical treatment each year we should also consider

itemization. Furthermore, if we are ineligible to receive the standard deduction,
we should itemize taxes.However, not everyone can itemize their taxes for
example spouses without a joint filed return. We have to remember however that
If an individuals itemized deductions are in excess of conventions established for
his income level, the probability of an audit is increased.
Response 2:
Medical treatment costs regularly fall short of the thresholds the taxpayers must
meet in this itemized deduction category. You rightly stated that the IRS allows
deductions in medical category only after they exceed a minimum amount tied to
the adjusted gross income. If an individual has adjusted gross income of about
$50,000 and he is below 65 years of age, this implies that his medical
expenditures must be more than $5,000. One possible way is to pay attention to
these expenditures throughout the year. It is true, as Paul pointed out that most
people are unable to plan the medical expenditures effectively. However, if the
taxpayer finds he is getting close to the limits, he can find medical treatments that
can cover this gap - if it is not significantly large. Going with the above example,
say he is near medical expenditure of $4800, he can cover the gap, for example,
by visiting eye specialist for an eye exam and getting a new pair of spectacles
that would enable him to claim the medical deduction. Some points to note
however, first- deductible medical care does not include cosmetic surgery which
is defined as any procedure directed at improving the patients appearance and
does not meaningfully promote the proper function of the body or prevent or treat
illness or disease, and second - for physically challenged individuals, any
removal or changes in structural barriers in their residences to accommodate
their physical condition, and all related expenses in doing those adjustments
such as constructing exit ramps, widening doorways and hallways, installation of
support bars etc. are fully deductible as medical expenses.

Q1.
This article addresses the problem of what to do when your costs regularly fall just
short of the income thresholds they must meet in some deduction categories, and
why individuals should consider alternating between the standard deduction and
itemized deduction. For example, most people can increase their deductions by
bunching two years of charitable donations and paying two years of property

taxes. The next year since your itemized list is reduced, you can take advantage of
standard deduction, which will be more than what you are qualified for otherwise.
Frequently tax planners fail to notice that middle-income families can make use of
this multi-year planning strategy to save modest amount in taxable income. For
joint filers specially, the total of itemized deductions using multi-year planning
easily exceeds the standard deduction, assuming they make two years worth of
donations in a single year prepay the local and state taxes for next year before the
end of the year. So in effect, bunching deductions for multi-year can increase the
itemized deductions for that year significantly, leaving only meager amount of
itemized deduction for next year, in which case the couple can take advantage of
standard deduction. The article addresses both sides of the picture by mentioning
some drawbacks including the hassle (extra time and work) to itemize and missing
out on interest income on the spent money in a single year.
We have learned the components of formula for federal income tax on individual in this
chapter. On pp 3-2, we have Framework 1040 Tax Formula for individuals where
they can deduct the greater of itemized deductions or the standard deduction from
Adjusted gross income, signifying the importance of itemized reductions when
they are greater than standard deduction. The taxpayer can see that itemized
deductions and standard deductions were designed as alternative by IRS so that
with little planning, the taxpayer can save modest amount in his taxable income.
Response 3 :

I believe it is safe bet because insurance expenditures are getting higher, and in that
case individuals would like to take advantage of high deductible health insurance policy
and put the premium savings in something like HSA. The fact its tax-deferred option
makes it reasonable retirement plan. Life expectancy when one reaches sixty-five years
age approximates to about eighty-five years so an average retiree needs to prepare for
a twenty year nest egg with enough savings to cover unexpected health care cost. HSA
also satisfies the quality of investment criteria and safe allocation of asset, as that of
risk aversion because there is tendency of individuals to move from risk tolerance to risk
aversion they reach retirement. Of course, we have to keep in mind that longer life
expectancy is a double edged sword. An an additional point to bear in mind I believe
how secure is your health saving account. Is it FDIC insured or some mutual fund which
is not insured? Do you need to worry if your HSA provider goes out of business?

Assignment #2

Chapter 3 #28, 33, 39, 48

Life expectancy when one reaches sixty-five years age approximates to about
eighty-five years so an average retiree needs to prepare for a twenty year nest
egg with enough savings to cover unexpected health care cost. HSA also
satisfies the quality of investment criteria and safe allocation of asset, as that of
risk aversion because there is tendency of individuals to move from risk
tolerance to risk aversion they reach retirement. However, of course, we have to
keep in mind that longer life expectancy is a double edged sword. :) An
additional point to bear in mind I believe is how secure is your health saving
account. Is it FDIC insured or some mutual fund which is not insured? Do you
need to worry if your HSA provider goes out of business?

The choice between the standard deduction and itemizing involves a

number of factors:
Only a taxpayer eligible for standard deduction can choose it.
U.S. citizens and resident aliens (for tax purposes) are eligible to take
the standard deduction. Nonresident aliens are not eligible.
If the taxpayer is filing as "married, filing separately", and his or her
spouse itemizes, then the taxpayer cannot take the standard
deduction. In other words, a taxpayer whose spouse itemizes
deductions must either itemize as well, or claim "0" (zero) as the
amount of the standard deduction.[1]
The taxpayer must have maintained the records required to
substantiate the itemized deductions.
If the amounts of the itemized deductions and the standard deduction
do not differ much, the taxpayer may take the standard deduction to
reduce the possibility of adjustment by the Internal Revenue Service
(IRS). The amount of standard deduction cannot be changed upon
audit unless the taxpayer's filing status changes.
If the taxpayer is otherwise eligible to file a shorter tax form such as
1040EZ or 1040A, he would prefer not to prepare (or pay to prepare)
the more complicated Form 1040 and the associated Schedule A for
itemized deductions.
The standard deduction is not allowed for calculating the Alternative
Minimum Tax. If the taxpayer chooses to take the standard deduction
for regular income tax, he or she cannot itemize deductions for the

AMT. Thus, for a taxpayer who pays the AMT (i.e. their AMT is higher
than regular tax), it may be better to itemize deductions, even if it is
less than the standard deduction.
itemize