Itemized vs. Standard Deductions

Each year taxpayers have the choice to take a standard deduction or to itemize their deductible expenses. This is usually a pretty simple decision. If your itemized expenses exceed the standard deduction for your filing status, complete schedule A and deduct the itemized amount.

For residents of Georgia (and possibly other states), the state’s standard deduction has largely remained constant with little or no adjustment for inflation. This creates a widening gap between the federal and state amounts for standard deductions. A Georgia resident who itemizes on their federal return must itemize on their Georgia return and taxpayers who take the standard deduction must also take the Georgia standard deduction. The quirk is that while Georgia allows 100% percent of the itemized deduction to reduce Georgia’s taxable income, Georgia only gives a standard deduction that amounts to one-quarter of federal deductions for most filing statuses (Single taxpayers are afforded about 40% of the federal amount).

This means that some taxpayers whose itemized deductions exceed the state but fall short of the federal standard deductions may save a few dollars by taking the smaller itemized deduction in lieu of the federal standard deduction.

The following chart shows the ‘break-even’ points at which residents of Georgia may prefer to itemize for each filing status and federal tax rate. The chart assumes a flat 6% rate for Georgia taxes and disregards any additional deduction for age or blindness.

Federal Rate - Dollar Amount (rounded to nearest dollar)

Single ($5,700 Fed - $2,300 State standard deductions)

10% - $4,425
15% - $4,729
25% - $5,042
28% - $5,100
33% - $5,177
35% - $5,202

MFS ($5,700 Fed - $1,500 State standard deductions)

10% - $4,125
15% - $4,500
25% - $4,887
28% - $4,959
33% - $5,054
35% - $5,085

MFJ ($11,400 Fed - $3,000 State standard deductions)

10% - $8,250
15% - $9,000
25% - $9,774
28% - $9,918
33% - $10,108
35% - $10,171

HOH ($8,350 Fed - $2,300 State standard deductions)

10% - $6,075
15% - $6,621
25% - $7,179
28% - $7,282
33% - $7,419
35% - $7,464

Tax software makes this easy to see which method is more advantageous. If you have any questions, you should contact a tax professional.

Year-End Housecleaning For Individuals

Yesterday I explained the recommended holding periods for documents as it applies to businesses. For the most part, the statute of limitations is similar for individuals. The result is that supporting documents should be kept for 7 years.

There are a couple of additional pieces of information that merit mention. It is advised that you keep a copy of your W-2s until you begin receiving social security benefits in the event that there is some question about your work record as it relates to your benefit calculation.

For capital gain and loss calculations you need to be able to establish your basis as it relates to capital assets. This means all purchase information regarding your investments need to be retained for as long as you own the asset and for 7 years after disposition.

As always, if you have any questions about the length of time to maintain adequate records, consult your tax professional.

Year-End Housecleaning

This time of year I am often asked about record keeping requirements. As people are cleaning out offices and storage space a common question is ‘How long should business owners keep their supporting documents for tax purposes?’

For income tax purposes, the minimum amount of time a business should retain its documents is 3 years. This 3 years period assumes all tax returns were timely filed, were not fraudulent and there is no understatement of income in excess of 25% of the gross income shown on the return. The statute of limitations does not begin until a return is filed, so if a business is not filing returns those records should be kept until 3 years after the return is filed.

If there is an understatement of income that is more than 25% of the gross income shown, the IRS has 6 years to audit assess additional tax. If a business is claiming a loss for worthless stock or bad debt, the period of record retention is 7 years.

For this, reason it is advised that businesses keep all supporting documents a minimum of 7 years.

There are some other items that should probably be kept even longer. For example, items of support for depreciable property should be kept for 7 years until after the property has been disposed. After all, if your 2008 tax return is audited you may have to prove that current depreciation is being properly calculated for assets placed into service more than seven years earlier. Businesses will also want to be able to prove that sold or disposed assets are properly reported until the stature of limitations expires.

For payroll tax purposes, all supporting documents (timesheets, employee W-2’s, form 940s, 941s, etc.) should be kept for 4 years past when the tax comes due or is paid whichever is later. So for unpaid payroll taxes the clock doesn’t start ticking until the balance due is paid in full.

Electronic records are acceptable, so if space is the main issue of concern converting paper documents to some electronic medium may allow businesses to free up space.

As you wind down your 2009 activities, I hope this helps you make space to have a worry free 2010.