To Itemize or Not -- Show Me the Deduction

Tax time is just around the corner. While no one likes paying taxes, everyone likes to reduce their tax bill and potentially receive a refund. So, what is the best way to do this? First, you must determine which scenario will provide more tax advantages -- taking the standard deduction or itemizing your tax returns. According to the IRS, most taxpayers take the standard deduction, which varies according to your filing status, and is higher for taxpayers who are 65 or older, as well as the blind. In 2004, the standard deductions are as follows:

$4,850 for single filers or married couples filing separately

$7,150 for head of household filers

$9,700 for married couples filing jointly

In order to assess if you should take the standard deduction, take into account the amount you paid over the course of the year in items such as mortgage interest, state and local taxes, medical care, job search activities, and donations to charities. If this amount is less than the standard deduction, you should take the standard deduction, which simplifies your tax returns and eliminates the need to keep all of your receipts related to your deductions.

Doing the math is critical. In fact, the last time the federal government reviewed taxpayers' decisions to take the standard deduction or itemize, the results were pretty astounding -- 2.2 million people erroneously overpaid an average of $438 to the IRS.

Deduct, Deduct, Deduct ...

If itemizing your taxes will provide you with greater benefits, below are some important deductions that could result in a less-taxing April 15 for you.

1. Sales tax

A new law permits you to deduct either your state and local income tax or your state and local sales tax, but not both. This change will be of particular interest to those taxpayers living in states with no separate income tax such as Florida, Nevada, South Dakota, Tennessee, Texas and Wyoming. However, those living in states with income taxes still could benefit if their state income tax rates are low enough to make the sales tax deduction valuable.