If you’ve always filed your taxes with a 1040EZ, you may not be familiar with the Schedule A. Schedule A is where you report allowable itemized deductions against your income.
(Filers using a 1040EZ take the standard deduction, and are not required to fill out a Schedule A.)
Deductions lower your tax liability by reducing the amount of income against which you pay federal income tax.
For example, let’s just say that you and your office mate make equal salaries. After the standard deduction, your salary is $34,000; after deductions your office mate takes for mortgage interest, state and local taxes, and a few other things, his taxable income is $30,000.
What difference does that make in your wallet? All other things being equal, you’ll pay $4681.25 in federal income taxes. Your office mate will pay $4,081.25.
Every deduction will lower your tax bill by the amount of the deduction multiplied by your marginal tax rate. As you can see, the more allowable deductions you can take, the better.
That makes the Schedule A one of the most important forms you’ll fill out in a tax year. Below is a look at all of the information you’ll want handy when it comes time to fill out the Schedule A.
- Medical and dental expense records – You can deduct from your taxes any medical expenses exceeding 7.5% of your Adjusted Gross Income. This includes most procedures, prescriptions, and premiums. Bills from providers and insurers will help you fill out your schedule A.
- Taxes paid – There are several taxes you can deduct from your federal taxable income. You can deduct either state and local income or general sales taxes paid, real estate taxes, property taxes, new motor vehicle taxes, and others. You’ll want records of all these taxes.
- Interest paid – You’ll want Form 1098 (provided by your bank) as a record of any mortgage interest paid during the year. You’re also allowed to deduct certain qualified mortgage insurance premiums, and you’ll want a record of that also.
- Gifts to charity – Donations to a federally recognized non-profit organization are tax-free. You’ll want receipts from the organization to document your donation.
- Hardship losses – If you were the unfortunate victim of losses due to theft or casualty, these losses are also deductible. Any relevant records will help fill out Form 4684, the form used to document such losses.
- Miscellaneous deductions – Including: certain gambling losses, federal estate tax on income in respect of a decedent, certain bond premiums, certain amounts paid in respect to a claim of right, certain unrecovered investment in a pension, and impairment related work expenses of disabled persons.
That, in a nutshell, is the collection of documents you’ll want to have ready when it comes time to fill out your Schedule A. However, don’t start collecting them the day before taxes are due!
Many tax forms will be furnished to you at the end of the year—your mortgage carrier will provide you with a Form 1098, for example—but it will benefit you to keep track of expenses like medical bills and charitable gifts throughout the year.
Finally, keep these allowable deductions in mind when making financial decisions throughout the year. Thinking about a charitable contribution?
For filers itemizing deductions, donating a dollar to charity could cost you between 67 and 85 post-tax cents. The extra $100 per year in property taxes on your new car might only turn out to be $75 out of your pocket.
Make no mistake: deducting these expenses will never make up for the entire expense. But understanding your deductions will help you lay the best plans. And the best laid plans usually offer the best results.