Choosing the right tax form and mulling over the breaks you claim can help simplify things. We asked Bob Scharin, a senior tax analyst at Thomson Tax & Accounting, a provider of tax information and software, about lowering stress.
Q. Despite the trouble, the best way to save tax is to itemize deductions, right?
A. Itemizing lets people who spend more than a standard overall amount on certain expenses get a tax benefit for their extra payments. But people whose expenses are less than the standard deduction generally lose out by itemizing.
Among candidates to itemize are homeowners with mortgage interest, people who pay high state and local tax, and donors to charity.
But the standard deduction keeps growing. It is $10,700 for a married couple filing a 2007 joint return, up $400 from 2006, and is $5,350 for singles, up $200. People 65 or older or blind get an additional amount.
Q. Can you itemize one year and take the standard deduction another?
A. Certainly. Some taxpayers take the standard deduction when they are young, itemize when they start a family and buy a home, then switch to the standard amount in retirement.
Taxpayers whose deductions total close to the standard amount can try to bunch deductible expenses into one year. They can itemize in the year into which they shift deductible expenses and take the standard deduction in the year from which the expenses are shifted.
Q. Is itemizing the only way to get deductions?
A. Whether you take the standard deduction or itemize, additional deductions are allowed on top of those amounts for, among other things, IRA contributions, student loan interest, college tuition, work-related moves, and certain teacher expenses.
Subtractions for dependent and personal exemptions are in addition to the itemized or standard total.
And don't forget possible tax credits related to education bills, your children, and other items. Unlike a deduction, which reduces the income to which your tax rate is applied, a credit directly reduces your tax dollar for dollar by the amount of the credit.
Q. What about a simpler form than the 1040?
A. The advantage of the 1040A and even simpler 1040EZ is their brevity. If, for example, you are under 65 and report only wages and limited interest, have no dependents and claim the standard deduction, you may be able to breeze through with the 1040EZ.
If your income includes a pension, dividends, or taxable Social Security, or you claim dependents and utilize various popular tax breaks, you have to step up to the 1040A.
But sometimes you must use the 1040, for example to itemize deductions or pay low capital-gains tax on the sale of stock and other assets. The IRS requires the 1040 once your taxable income hits $100,000.
Q. Things are simpler if you hire a tax preparer...
A. Using a professional relieves you of number crunching and a lot of rule deciphering. But if you fail to mention some items and the preparer doesn't ask, you can lose out.
Q. Can tax software help?
A. They can do calculations, enter data in the right place, and point out breaks. But you still may have to read and interpret relevant tax provisions.