Tax Time: What You Can and Can't Deduct

Most people have a notion that there's a lot of stuff they can deduct, but don't quite know when or how to do so. That confusion can lead to higher taxes. So here's the skinny:

Deductions lower your taxable income. The lower your taxable income, the lower your tax bill. The vast majority of Americans take what's called the standard deduction, which is available to everyone.

For 2002 returns, the standard deductions are:

• $4,700 for single filers;

• $7,850 for married couples filing jointly;

• $6,900 for head-of-household filers;

• $3,925 for married couples filing separately.

But some taxpayers -- particularly those who pay a lot of mortgage interest and/or have high state tax bills -- can often benefit from itemizing their deductions. If the amount of all your itemized deductions exceeds the applicable standard deduction, you're better off itemizing. To do so, you'll need to list the deductions on Schedule A of Form 1040.

(Some deductions that are available to some taxpayers whether they itemize or not. For more on these so-called above-the-line deductions, see Deductive Reasoning -- How to Get the Most From Your Tax Deductions.)

Itemized deductions are not unlimited -- if your 2002 adjusted gross income exceeds $137,300, some of your itemized deductions will be reduced. (Deductions for medical expenses, casualty and theft losses, gambling losses and investment interest expenses won't be reduced.) Your deductions will be reduced by 3% of the excess AGI over $137,300.

In other words, let's say your AGI is $177,300 and you have deductions for mortgage interest, charitable contributions and state and local taxes amounting to $20,000. The AGI excess over $137,300 is $40,000, so your itemized deductions will be reduced by $1,200 (3% of $40,000). You'll be allowed to deduct just $18,800 instead of the full $20,000.