Deductions reduce your taxable income. And less income means a smaller tax bill.

In this tax tip: • Standard deduction amounts increased   • Itemizing ground rules   • Filing status affects figures

What's the best way to reach the smallest possible taxable income level? It depends on your personal circumstances.

The Internal Revenue Service says most taxpayers use the standard deduction. The amount is different for each filing status and is higher for blind taxpayers and those age 65 or older. The amounts are also adjusted for inflation each year.

Married couples who've been submitting joint returns for a while will notice their standard deduction amount has jumped substantially in recent filing years. They can thank inflation adjustments, as well as tax-law changes initiated in May 2003 and expanded this year, that are designed to help ease the marriage penalty.

And some older and visually impaired taxpayers may be able to cut their tax bills with even larger standard deduction amounts by simply checking a couple of boxes on their tax returns.

That means the standard deduction might now be more appealing to even more taxpayers. Remember, you always want to use the deduction method that gives you the biggest tax advantage.

So if all those receipts you stashed last year in the hopes of turning them into tax breaks add up to less than your standard deduction amount, throw them away. There's no need to waste your time filling out extra forms.

But individuals who spend a lot on medical care, mortgage interest, state and local taxes, charitable contributions or a variety of miscellaneous items generally are better off itemizing.

Even purchases might help out some filers at tax time this year, thanks to the deduction for state sales taxes paid. When all of these expenditures exceed the standard deduction, you'll save on your taxes by filling out Schedule A along with your 1040.

Itemizing ground rules
When you do itemize, there are a few things to keep in mind.

First, not every dollar you spend can be subtracted from your income. In the medical category, only expenses that exceed 7.5 percent of your adjusted gross income can be deducted. If you didn't spend that much, then none of your costs are deductible.

You have to reach a 2-percent-of-income threshold before you can use miscellaneous deductions, such as unreimbursed job expenses and investment and tax-preparation costs. There also are restrictions on how much in casualty losses you can deduct, as well as limits on the deductibility of very large charitable contribution amounts.

Second, your overall itemized deduction amount for 2006 might be reduced if you make more than $150,500. That amount applies to both single and married joint filers. The earnings limit is $75,250 each for a husband and wife who decide to file separately.

Filing status affects figures
Third, filing status sometimes affects your deduction method and amount. Married couples who file separately, for example, must work together when it comes to deciding which deduction route to take. Even though each partner will fill out a separate return, if one spouse decides to itemize, the other must do so, too. Similarly, if someone claims you as an exemption on his tax return, the amount of the standard deduction you can take on your own return may be limited.

Finally, your deduction decision isn't a lifelong commitment. As long as you meet the other guidelines discussed above, you can claim the standard deduction one year and itemize the next. Again, use the deduction method that gives you the lowest tax bill.

For more details on itemized deductions, see the instructions for Schedule A, Itemized Deductions. Standard deductions are discussed in IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.

Freelance writer Kay Bell writes Bankrate's tax stories from her home in Austin,
Texas, and blogs daily on tax topics at Don't Mess with Taxes.