When completing a tax return, individuals are faced with the decision of filing itemized deductions or the standard deduction. That decision is made on line 39 of the IRS Form 1040. If the itemized deductions are greater than the standard deduction, then income taxes owed will be lower.
For many Americans, filing income tax returns can be a tiresome task; one that most people would rather avoid. But when it comes to itemizing, it's important to avoid shortcuts, or it's possible to miss a valuable tax deduction.
All taxpayers have the opportunity to take either the standard deduction or itemize. This dollar value is then subtracted from the filer's adjusted gross income, or AGI, to calculate their taxable income. Itemizing is usually the last opportunity someone has to lower their tax liability and increase their tax refund.
The standard deduction might look terribly large, but if mortgage payments are made, or property taxes are paid, then it's usually better to itemize. The only thing a filer has to lose is the time it takes to fill out Schedule A. If itemizing isn't advantageous, then it's still possible to take the standard deduction.
The total of all itemized tax deductions are calculated using Schedule A (Form 1040). The IRS breaks down deductions into seven distinct categories of expenses. In the sections below is a brief discussion of each category, and some of the common deductions taken on Schedule A.
To qualify for a medical or dental expense deduction, the total out of pocket costs must exceed 7.5% of the taxpayer's AGI. The deduction taken is for unreimbursed expenses in excess of the 7.5%. One significant expense is the premiums paid toward medical and dental insurance; if those premiums were paid with after-tax dollars.
If income taxes were not paid on the dollars used to pay health insurance premiums, this expense cannot be deducted. It's also possible to take deductions for prescription medications, Medicare Supplemental Insurance, routine and emergency medical care, and the costs of certain expenses such as lodging if the cost is associated with receiving medical care.
Non-emergency medical and dental care can oftentimes be delayed and subsequently bundled into one year, increasing the likelihood of beating the 7.5% threshold.
In this section, deductions are taken for taxes paid to other jurisdictions. This does not apply to federal income taxes, Social Security or Medicare taxes. Typically, this is a category that should add considerably to the deduction total.
For example, it's possible to include state and local income taxes, sales tax, real estate taxes, and personal property taxes such as registration fees on a car in this section. The largest of these deductions will probably be state income tax and any real estate taxes paid to a township or municipality. If the taxpayer has a mortgage, the real estate taxes paid should be shown on a form received from the lender: Form 1098, Mortgage Interest Statement.
Once again, if an individual owns a home, and has a mortgage or another qualifying loan, this category of expense should add considerably to the total itemized deductions. Lenders will send Form 1098, which includes the interest expense paid on loans.
Generally, the points paid when buying a home are deductible in the year the home was purchased, and these amounts are also included in Form 1098. If points were paid when refinancing an existing home, the points are deductible over the life of the loan.
Gifts made by check can be proved using the check itself. Individuals making a gift of property, such as donating a car or clothing, need a receipt for the gift or an appraisal of its fair market value. This is not the same as the original price paid for the property.
If a casualty or loss due to theft was suffered, the taxpayer needs to complete IRS Form 4684. Similar to medical and dental expenses, it's only possible to take a deduction for this category if the calculated loss exceeds 10% of the filer's AGI. Typical losses include vandalism, storm damage / flood damage, and even the bankruptcy of others.
Most employers are very good at reimbursing their employees for job-related expenses. However, if any unreimbursed expense such as the purchase of tools, uniforms, or travel, is incurred, they are reported in this section. Only those out-of-pocket expenses in excess of 2.0% of AGI can be deducted.
This is another complex area of deductions; in fact, the IRS has put together a 29 page publication dedicated to Miscellaneous Expenses: Publication 529. Individuals in certain professions such as teaching, the military, or performing arts, may find it worthwhile to look through these materials.
The last step in this process is to sum the itemized deductions appearing on Schedule A to see if they are higher than the allowed standard deduction. The following table contains the standard deductions for the tax years 2016 and 2015:
|Married Filing Jointly||$12,600||$12,600|
|Married Filing Separately||$6,300||$6,300|
|Head of Household||$9,250||$9,300|
Even if a taxpayer does not beat the standard deduction, reviewing the categories of expenses in Schedule A provides insights into what changes might allow for itemizing in the future.
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