Let's clarify:
An exemption is different from a deduction. The exemption is $3,300 per person.
The standard deduction for 2006 is $5,150 (single) and $10,300 for married, widow/er
You can choose to take either the standard deduction, or you can itemize. If your total itemized deductions are greater than the standard amount (5,150), then it makes sense to itemize. The tax prep programs will ask various questions about itemized amounts, and if you cross the threshold of $5,150, the program will automatically use you itemized deductions.
Medical expenses; Let's assume your medical expenses are $5,000. Let's also assume that your adjusted gross income is $30.000. The first 7.5% of AGI does NOT qualify for the deduction. $30,000 X .075 = $2,250. Therefore, the balance (5,000-2,250 = $2,750) is deductible on Schedule A.
Schedule A items include: Medical expense, state and local taxes, real estate taxes, investment interest, mortgage interest, casualty and theft losses, unreimbursed job employee expenses (these have a threshold of 2%--think of medical expense example), donations to charities (must be a charitable organization, not your buddy). The IRS is now requiring that you have documented proof of the donation(s).
For a cheap tax prep software, go to taxact.com. You can prepare your return real cheap there.
In review, take the itemized deduction when it is greater than the standard deduction. Everyone gets one exemption. (Caveat: People that earn big bucks start getting a phase-out of of exemptions and a graduated reduction of allowable itemized deductions.) Tax returns for 50% of the population are real easy to prepare. I can prepare most of these returns in 5-10 minutes. I have prepared returns that took an entire day, but that client had numerous investment accounts. So, if you use the right software, it will be cheap and easy. If you have any investments or complicated transactions involving real estate, etc, you should contact a professional. Using a preparer is only beneficial when you begin to accumulate wealth and you need the tax planning necessary to avoid high taxation.
Ric Honsa
CPA candidate (I get my CPA license this year-I've passed the CPA exam)