Are you confused about itemizing your tax deductions? You are not alone. I’d like to break down some basics.
The Internal Revenue Service (IRS) allows you to deduct from income EITHER a Standard Deduction OR your Itemized Deductions. In most cases you can choose to take which ever deduction gives you the best result on your tax return.
The Standard Deduction for single taxpayers and married couples filing separately is $6,350 in 2017, for married couples filing jointly, the standard deduction is $12,700, and for heads of households, the standard deduction is $9,350, there is also an additional standard deduction for individuals who are blind or age 65 or over. The standard deduction for a taxpayer who can be claimed as a dependent by another taxpayer cannot exceed the greater of (a) $1,050 or (b) $350 + the dependent’s earned income.
The goal of Itemizing is to beat the Standard Deduction. If you have qualified Itemized deductions that add up to more than the Standard Deduction, then you would subtract your itemized deductions from your income instead of subtracting the Standard Deduction. This is done by using Schedule A and entering the calculated amount on the appropriate line of your tax return.
Qualified Itemized Deductions include most taxes you have paid, for example real estate taxes, foreign taxes EITHER state and local income tax or sales tax (whichever is higher) personal property taxes as well as mortgage interest and points from refinancing, charitable contributions, qualified medical expenses that exceed 7.5% of your income, casualty and theft losses, qualified job expenses and other specific investment or miscellaneous expenses.
Under certain circumstances, your itemized deductions may be limited. This can happen when your income exceeds certain limits or in cases where AMT apply.
All in all, while most Americans do use the Standard Deduction, it is worth looking to see if Itemizing would be a benefit for you. For many it is. If you have a high interest rate on your mortgage or expensive medical bills, itemizing may be for you. High wage earners may pay a lot in state and local income taxes, this often is enough to make itemizing the best option. Perhaps you sold your home and CA required state withholding. This is another example where taxes can be enough to tip the scale towards itemizing.
Beginning tax year 2018 (this will affect you when you file your taxes in 2019), President Trumps “Tax Cuts and Jobs Act” will make significant changes to the way we itemize our deductions. The standard deduction almost doubles, and your personal exemptions go away. Several allowable itemized deductions are eliminated or capped. My next blog will go over some of the most significant changes that we will be faced with.
A list of your rights as a taxpayer and IRS obligations to protect them can be found in IRS Publication 1, Your Rights as a Taxpayer. Here is a link. https://www.irs.gov/pub/irs-pdf/p1.pdf. It includes #3, The Right to Pay No More than the Correct Amount of Tax.
Morgan Stanley: “You must pay taxes. But there’s no law that says you gotta leave a tip.”