For many people, our biggest priority at tax time is to get everything done quickly and painlessly, with little to no financial penalties. This usually means many people take the standard versus the itemized deduction in an effort to same time — and perhaps under the assumption that their itemized deductions will end up being less than or equal to the standard deduction anyway.
But depending on your situation, it may make the most financial sense for you to itemize your deductions. In some cases, you may be able to deduct more from your taxes by itemizing than by taking the standard deduction. Review the following to determine if an itemized deduction would work best for you.
Standard Versus Itemized Deductions
At a basic level, tax deductions reduce your taxable income. Whether you take the standard deduction or itemize, everyone files for a deduction on their taxable income. The more you reduce your taxable income, the smaller your tax bill will be. Determining whether the standard deduction or the itemized deduction depends on your personal situation.
The standard deduction amount is adjusted for inflation each year, and is higher for blind taxpayers and those who are 65 years old or older. According to the IRS, approximately 2 out of every 3 taxpayers claims the standard deduction on their tax returns. In 2015, the standard deduction amounts are:
- Single (Unmarried Individuals): $6,300, an increase of $100 from 2014
- Married Filing Separately: $6,300, an increase of $100
- Head of Household: $9,250, an increase of $150
- Married Taxpayers Filing Jointly and Qualifying Widow(er)s: $12,600, an increase of $200
You can always choose the standard deduction. But if you’re not sure your itemized deductions are more than the standard deduction, it’s worth it to go through and itemize to see if you could claim a larger deduction.
Requirements to Itemize
In some cases, you may be required to file for itemized deductions instead of taking the standard deduction. Not every taxpayer qualifies for standard deductions, including married couples who file separate and one spouse itemizes. If one spouse itemizes, then both will have to itemize.
If you’re unsure if you should itemize, first visit the IRS’ Interactive Tax Assistant tool to help determine if itemizing or choosing the standard deduction is best for you.
Deciding to Take Itemized Deductions
Once you’ve determined you should itemize, it’s important to figure out your itemized deductions. You may need to go through old receipts or statements you’ve collected throughout the year; tax time is when it pays to be organized.
Deductible expenses you can itemize include:
- Home mortgage interest
- State and local income taxes or sales taxes (but not both)
- Real estate and personal property taxes
- Gifts to charities
- Casualty or theft losses
- Unreimbursed medical expenses
- Unreimbursed employee business expenses
There are special rules to this list, and limits do apply. Visit IRS.gov and refer to Publication 17, Your Federal Income Tax for more information. (And remember, if all this is getting confusing — you can always ask a pro to help you! Putting together your money team is a critical step to success with your finances.)
If you do decide to itemize, keep in mind that not every dollar can be subtracted from your income. For instance, you have to reach a 2% of income threshold before you can itemize miscellaneous deductions, like unreimbursed job expenses and tax preparation costs. There are also limits to the deduction amount of large charitable contributions.
You’ll also want to take these special considerations into account:
Home ownership: If you have a mortgage or home equity loan on your home, fill out Schedule A to determine if your itemized deductions are larger than the standard tax deduction.
In January, your mortgage lender should send you the amount of mortgage interest you paid the previous year. If the interest you paid on your mortgage is larger than your standard deduction, it would benefit you to itemize. Even if your mortgage interest doesn’t quite exceed your standard deduction, your other itemized expenses may help put you over the standard deduction amount.
Charitable deductions: It’s important to keep in mind you can deduct charitable donations only if you itemize your deductions. Add up the amounts you’ve donated to charities. This includes material items you may have donated, like furniture or clothes. You can use Publication 561 to help you determine the value of your donated items.
If you’re donating more than $250 in items, you’ll want to get a receipt or some type of documentation acknowledging your donation.
Medical costs: Before beginning to itemize unreimbursed medical expenses, remember that you can only deduct costs to the extent that your expenses exceed 10% of your Adjusted Gross Income (AGI). If your AGI is $50,000, the first $5,000 in unreimbursed medical expenses do not count.
Before going through your medical bills and prescription receipts, make sure to do a quick calculation to ensure you’re not wasting your time.
If your medical costs do exceed your AGI, continue to itemize on your doctor bills, prescription costs, as well as dentist, chiropractor, and lab charges. You can also include contact lenses, glasses, prescription drugs and medical supplies. If you’re not sure if a particular medical expense counts, refer to IRS Publication 502.
Other miscellaneous expenses you may be able to deduct include:
- Union or other professional organization dues
- The cost of protective work clothing or uniforms you’re required to wear to work
- Expenses incurred while job searching, like resume review costs, career counseling, etc.
- Subscriptions to magazines and other publications related to your work
- Fees charged by the financial company that manages your IRA account, but only if you don’t pay the maintenance fees directly from your IRA
- Tuition for classes that maintain or improve skills directly related to your current job
- Depreciation on your computer or cellphone, but only for the time you use that equipment as part of your job
Understanding Alternative Minimum Tax
The Alternative Minimum Tax (AMT) was originally designed to keep wealthy taxpayers from using loopholes to avoid paying taxes. But as it’s not adjusted for inflation, more middle-class taxpayers fall under AMT rules each year.
Determining if you’re subjected to the AMT means calculating your tax liability twice: once under the rules of the regular income tax code, and once under AMT rules. You must pay whichever is higher. To figure out if you owe additional tax under AMT, fill out (or have your accountant fill out) Form 6251. If this amount is higher than what was calculated on your regular tax return, you have to pay the difference.
If you’re unsure you’ll fall under AMT rules, visit the IRS’ AMT Assistant to determine whether or not you’ll need to fill out Form 6251 at tax time.
Once you decide to itemize your deductions, you’re not bound to itemize every year in the future. If you need to file for the standard deduction the following year, you can do so in most cases. Your goal is to use the deduction method that gives you the lowest tax bill, and many software programs as well as tax professionals can help you determine with method is best for you.
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