Standard Deduction(p22)

Most taxpayers have a choice of either taking a standard deduction or itemizing their deductions. If you have a choice, you can use the method that gives you the lower tax.

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,
• Are blind,
• Pay state or local real estate taxes, or
• Have a net disaster loss from a federally declared disaster.

Your standard deduction is zero and you should itemize any deductions you have if:

1. You are married, filing a separate return, and your spouse itemizes deductions,
2. You are filing a tax return for a short tax year because of a change in your annual accounting period, or
3. 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.If you are a nonresident alien who is married to a U.S. citizen or resident alien at the end of the year, you can choose to be treated as a U.S. resident. (See Publication 519.) If you make this choice, you can take the standard deduction.
   

The standard deduction amount depends on your filing status, whether you are 65 or older or blind, whether an exemption can be claimed for you by another taxpayer, whether you pay state or local real estate taxes, and whether you have a net disaster loss from a federally declared disaster. Generally, the standard deduction amounts are adjusted each year for inflation. Use Worksheet 3 to figure your standard deduction amount.

The amount of the standard deduction for a decedent's final tax return is the same as it would have been had the decedent continued to live. However, if the decedent was not 65 or older at the time of death, the higher standard deduction for age cannot be claimed.

If you do not itemize deductions, you are entitled to a higher standard deduction if you are age 65 or older at the end of the year. You are considered 65 on the day before your 65th birthday.

Therefore, you can take a higher standard deduction for 2008 if you were born before January 2, 1944.

If you are blind on the last day of the year and you do not itemize deductions, you are entitled to a higher standard deduction. You qualify for this benefit if you are totally or partly blind.

If you are partly blind, you must get a certified statement from an eye doctor or registered optometrist that:

1. You cannot see better than 20/200 in the better eye with glasses or contact lenses, or
2. Your field of vision is not more than 20 degrees.

If your eye condition will never improve beyond these limits, the statement should include this fact. You must keep the statement in your records.

If your vision can be corrected beyond these limits only by contact lenses that you can wear only briefly because of pain, infection, or ulcers, you can take the higher standard deduction for blindness if you otherwise qualify.

You can take the higher standard deduction if your spouse is age 65 or older or blind and:

1. You file a joint return, or
2. You file a separate return and can claim an exemption for your spouse because your spouse had no gross income and an exemption for your spouse could not be claimed by another taxpayer.

Your standard deduction is increased by any state and local real estate taxes you paid in 2008, up to $500 ($1,000 if married filing jointly). The taxes must be state or local real estate taxes that would be deductible on Form 1040 (Schedule A) if you were itemizing your deductions. Taxes deductible in arriving at adjusted gross income, such as taxes on business real estate, and taxes on foreign real estate cannot be used to increase your standard deduction.

If you are increasing your standard deduction by the amount of real estate taxes you paid, be sure to check the box on line 39c of Form 1040 or line 23c of Form 1040A.

Your standard deduction is increased by any net disaster loss from a federally declared disaster that occurred in 2008. This amount is on Form 4684, line 18a.

If you are increasing your standard deduction by the amount of your net disaster loss, be sure to check the box on line 39c of Form 1040.

See the instructions for Form 4684, Casualties and Thefts, and Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas, for more information.

The following examples illustrate how to determine your standard deduction using Worksheet 3.

Larry, 46, and Donna, 33, are filing a joint return for 2008. Neither is blind, and neither can be claimed as a dependent. They did not pay real estate taxes or have a net disaster loss. They decide not to itemize their deductions. Because they are married filing jointly, they enter $10,900 on line 1 of Worksheet 3. They check the "No" box on line 2, so they also enter $10,900 on lines 4 and 10. Their standard deduction is $10,900.

The facts are the same as in Example 1, except that Larry is blind at the end of 2008, so he and Donna enter $1,050 on line 5 of Worksheet 3. They then enter $11,950 ($10,900 + $1,050) on line 10, so their standard deduction is $11,950.

Bill and Lisa are filing a joint return for 2008. Both are over age 65. Neither is blind, and neither can be claimed as a dependent. They did not pay real estate taxes or have a net disaster loss. They do not itemize deductions, so they use Worksheet 3. Because they are married filing jointly, they enter $10,900 on line 1. They check the "No" box on line 2, so they also enter $10,900 on line 4. Because they are both over age 65, they enter $2,100 ($1,050 × 2) on line 5. They enter $13,000 ($10,900 + $2,100) on line 10, so their standard deduction is $13,000.

The facts are the same as in Example 3 except that Bill and Lisa paid $3,000 in local real estate taxes on their home in 2008, so they enter $3,000 on line 7 of the worksheet. They then enter $1,000 on lines 8 and 9 and $14,000 ($10,900 + $2,100 + $1,000) on line 10. Their standard deduction is $14,000.

The facts are the same as in Example 4 except that Bill and Lisa had a net disaster loss from a federally declared disaster of $8,000. That is the amount on line 18a of their Form 4684. They enter $8,000 on line 6 of their standard deduction worksheet. On line 10 of the worksheet, they enter $22,000 ($10,900 + $2,100 + $8,000 + $1,000), which is their standard deduction.

The standard deduction for an individual for whom an exemption can be claimed on another person's tax return is generally limited to the greater of:

1. $900, or
2. The individual's earned income for the year plus $300 (but not more than the regular standard deduction amount, generally $5,450).

However, if the individual is 65 or older or blind, paid state or local real estate taxes, or had a net disaster loss from a federally declared disaster, the standard deduction may be higher.

If an exemption for you (or your spouse if you are married filing jointly) can be claimed on someone else's return, use Worksheet 3 to determine your standard deduction.

Earned income is salaries, wages, tips, professional fees, and other amounts received as pay for work you actually perform.

For purposes of the standard deduction, earned income also includes any part of a scholarship or fellowship grant that you must include in your gross income. See chapter 1 of Publication 970 for more information on what qualifies as a scholarship or fellowship grant.

Michael is single. His parents claim an exemption for him on their 2008 tax return. He has interest income of $780 and wages of $150. He did not pay real estate taxes or have a net disaster loss. He has no itemized deductions. Michael uses Worksheet 3 to find his standard deduction. Because he is single, he enters $5,450 on line 1. He checks the "Yes" box on line 2, enters $900 on line 3, and also enters $900 (the smaller of line 1 and line 3) on line 4. He leaves lines 5, 6, 7, 8, and 9 blank and enters $900 on line 10. His standard deduction is $900.

Joe, a 22-year-old full-time college student, is claimed on his parents' 2008 tax return. Joe is married and files a separate return. His wife does not itemize deductions on her separate return. Joe has $1,500 in interest income and wages of $3,800. He did not pay real estate taxes or have a net disaster loss. He has no itemized deductions. Joe finds his standard deduction by using Worksheet 3. Because he is married filing a separate return, he enters $5,450 on line 1. He checks the "Yes" box on line 2, enters $4,100 ($3,800 + $300) on line 3, and also enters $4,100 (the smaller of line 1 and line 3) on line 4. He leaves lines 5, 6, 7, 8, and 9 blank and enters $4,100 on line 10. His standard deduction is $4,100.

Amy, who is single, is claimed on her parents' 2008 return. She is 18 years old and blind. She has interest income of $1,300 and wages of $2,900. She did not pay real estate taxes or have a net disaster loss. She has no itemized deductions. Amy finds her standard deduction by using Worksheet 3. Because she is single, she enters $5,450 on line 1. She checks the "Yes" box on line 2, enters $3,200 ($2,900 + $300) on line 3, and also enters $3,200 (the smaller of line 1 and line 3) on line 4. Because she is blind, she enters $1,350 on line 5. Because she did not pay real estate taxes or have a net disaster loss, she does not fill out lines 6, 7, 8, and 9. She enters $4,550 ($3,200 + $1,350) on line 10. Her standard deduction is $4,550.

You should itemize deductions if your total deductions are more than the standard deduction amount. Also, you should itemize if you do not qualify for the standard deduction, as discussed earlier under Persons not eligible for the standard deduction.

You should first figure your itemized deductions and compare that amount to your standard deduction to make sure you are using the method that gives you the greater benefit.

You may benefit from itemizing your deductions on Schedule A (Form 1040) if you:

1. Do not qualify for the standard deduction, or the amount you can claim is limited,
2. Had large uninsured medical and dental expenses during the year,
3. Paid interest and taxes on your home,
4. Had large unreimbursed employee business expenses or other miscellaneous deductions,
5. Had large uninsured casualty or theft losses,
6. Made large contributions to qualified charities, or
7. Have total itemized deductions that are more than the standard deduction to which you otherwise are entitled.

If you decide to itemize your deductions, complete Schedule A and attach it to your Form 1040. Enter the amount from Schedule A, line 29, on Form 1040, line 40.

Even if your itemized deductions are less than the amount of your standard deduction, you can elect to itemize deductions on your federal return rather than take the standard deduction. You may want to do this, for example, if the tax benefit of being able to itemize your deductions on your state tax return is greater than the tax benefit you lose on your federal return by not taking the standard deduction. To make this election, you must check the box on line 30 of Schedule A.

If you do not itemize your deductions and later find that you should have itemized — or if you itemize your deductions and later find you should not have — you can change your return by filing Form 1040X.

You can change methods of taking deductions only if you and your spouse both make the same changes. Both of you must file a consent to assessment for any additional tax either one may owe as a result of the change.

You and your spouse can use the method that gives you the lower total tax, even though one of you may pay more tax than you would have paid by using the other method. You both must use the same method of claiming deductions. If one itemizes deductions, the other should itemize because he or she will not qualify for the standard deduction. See Persons not eligible for the standard deduction, earlier.