- It's important to know the standard deduction amounts as well as the qualifications for itemized deductions in order to determine which you should take. In this example, John Doe is a single filer and has an adjusted gross income (AGI) of $50,000. As of 2008, his standard deduction is $5450, which is the amount he can subtract from his AGI reducing his taxable income to $44,550. John will calculate his deductions on schedule A before simply taking the standard deduction.
- John gathers his receipts and tallies all his out-of-pocket payments for medical and dental expenses during the tax year. He's covered by his employer's health plan and had limited visits to the doctor. His co-pays and dental visits total $380. However, there's a minimum in place before itemizing this amount. John multiplies his AGI by the 7.5 percent requirement. That amount is $3750---far above the amount John paid during the year. He may not itemize this amount.
- Next, John calculates his state and local taxes. He may claim either state and local income tax or general sales tax, but not both. He chooses the income tax since it is a higher amount and enters it ---$2000. His real estate tax is $2500, so he enters that as well. His personal property tax was $100 and there were no other taxes he could claim. He adds these amounts ($4600) and enters them on schedule A, line 9. This deduction is not restricted by his AGI.
- John paid mortgage interest during the year and received a form 1098 from his lender. He enters this number ($1800) on line 10. He has no other interest to claim in this section, including mortgage insurance premiums or investment interest. Like the deduction for taxes paid, this deduction is not restricted by his adjusted gross income.
- John made some charitable contributions, so he adds those amounts and gathers his receipts or cancelled checks for all amounts over $250. No single contribution exceeded $500, so he does not need form 8283, and this deduction is not restricted by his AGI. He enters his total of $1700 on line 19.
- John did not suffer any losses due to theft, vandalism, fire or storm and he did not have any accidents. If he had, he would complete form 4684 to determine the amounts he could deduct. He did pay union dues and had job education expenses. Since he does his own taxes, he did not pay tax preparation fees, or he could include that as well. His miscellaneous deductions' total is $850; however, there is a restriction based on his AGI of two percent. That figure calculates to $1000, so John may not itemize his deductions in this category.
- John adds his itemized deductions, and the sum is $8100. Despite not being allowed to claim his medical expenses and miscellaneous deductions, John still has a much higher deduction than the standard one. And since his adjusted gross income did not exceed $159,950, he is entitled to claim all of it and enters this amount on 1040, line 40.