updated 11/8/2004 7:08:53 AM ET 2004-11-08T12:08:53

It's important to get your itemized deductions and withholding right long before the last ding-dong of doom on April 15.

Unless, of course, you feel obligated to pay more than your fair share in Federal income tax or are compelled by a blind sense of duty to give Uncle Sam a good chunk of your money interest free for a year.

When filing the annual tax return, you immediately face a choice: take the standard deduction or itemize. The standard deduction is a flat amount set by law. Itemized deductions are actual expenses allowed by law. If these expenses exceed the standard deduction and if you have the receipts to document it, itemizing will save you money.

The standard deduction varies with your filing status. Here are the basics:

  • Single, $4,750.
  • Head of household, $7,000.
  • Married filing jointly or qualifying widow or widower, $9,500.
  • Married, filing separately, $4,750.

In some cases, the standard deduction may include two parts: The basic standard deduction and additional standard amounts for age, blindness or both. If you are single or head of household the additional amount is $1,150. If you're married and filing jointly, married and filing separately, or a qualifying widow or widower, the additional amount is $950. If you file a separate return and are eligible to claim an exemption for your spouse, you can add the amount that applies to you or your spouse. Getting this straight requires reading dense Federalese in fine print so consult with a tax adviser if necessary.

To calculate if it makes sense to itemize, sharpen a pencil and grab Schedule A, a form included with Form 1040. List all your allowable expenses, add them up. If the total exceeds the standard deduction for your filing status, itemizing will save you money. If not, take the standard deduction.

Mortgage interest is the major deduction for most taxpayers. Other deductions include state and local income taxes, state and local taxes based on personal property such as a car or boat, charitable contributions, medical expenses and real estate taxes.

Getting the withholding amount right is another basic step in keeping the Tax Man from digging too deeply into your pocket.

Even an English major can understand the basics: If you claim too many exemptions, you'll be under-withheld and will end up shoveling more money to the IRS in the spring. But if you don't claim the exemptions you're entitled to, you'll be over-withheld and, in effect, you're lending your money interest-free to the government.

Some people use over-withholding to force them to save. Yes, they get a refund from the IRS each year, but they earn no interest. If this is your tactic, it's a bad one. Consider signing up for an automatic transfer of a portion of each paycheck to a savings account. The interest in a passbook account will be low, but it will be 100 percent more than what the government pays on the amount over-withheld.

To get withholding right, claim only the number of exemptions you're entitled to receive. If you've been over- or under-withheld throughout the year, now is a good time to make adjustments.

It's wise to file a new W-4 with your employer to adjust withholding if you pocketed a large refund last year, if you owed a significant amount, if you got married or divorced, if you had a baby or if your child can no longer be claimed as a dependent for tax purposes.

© 2012


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