Have you ever wondered whether you’re better off itemizing your tax deductions or simply taking the standard deduction? How much more difficult is it to itemize? Would you get a bigger tax break? And, well, what is itemizing anyway? We have the answers.
Let’s take a look at some of the most common itemized deductions, whether you’re eligible to deduct them, and if it would save you money come tax time.
Standard Deduction vs. Itemizing
If you’ve ever done your taxes, you’re likely aware that all taxpayers (companies and individuals) are allowed to deduct certain expenses from their tax bill each year. The purpose of this is to lower everyone’s overall tax burden and ensure that at least some of each taxpayer’s earnings are not subject to federal income tax.
Standard Deduction
For simplicity’s sake, and to level the playing field, the IRS instituted a flat (or standard) deduction that anyone can take. The standard deduction dollar amount is based on your filing status–single, head of household, married filing jointly, or married filing separately. For the 2017 tax year, this amount ranges from $6,350 to $12,700, with additional provisions for those over 65 or the blind.
There are only a few instances when you wouldn’t be able to take the standard deduction:
- If you file married filing separately, and your spouse itemizes deductions on his or her return
- If you’re filing jointly and you (or your spouse) were a non-resident alien at any point in the tax year
- If you alter your accounting period and end up filing a return that covers a period shorter than 12 months
Itemizing Deductions
So, what does it mean to “itemize?”
As the name suggests, deciding on itemized deductions means that you choose to itemize all tax-deductible expenses on your tax return, rather than opting for the flat deduction. This is beneficial if your eligible deductions add up to more than the standard deduction. You want to pick whichever one results in more deductions so you get a bigger tax break in the end.
Consider itemizing if any of the following apply to you in the last tax year:
- You made charitable donations (especially if they were considerable).
- You own a home and paid home mortgage interest.
- You have expenses related to investment income.
- You (or your dependents) have medical expenses beyond the occasional doctor’s visit.
- You paid property, state, or local income taxes.
- You have miscellaneous deductions to include.
Itemizing your deductible expenses is definitely more of a hassle than taking the standard deduction. It’s well worth it, though, if it will reduce your tax burden.
If you think there’s a chance that your deductible expenses are greater than your personal standard deduction amount, it’s worth running the numbers. Many online tax preparation companies will even help you with this and offer a suggestion on whether you should itemize or not.
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Common Itemized Deductions
1. Charitable Donations
Were you generous last tax year? Did you tithe to your church, contribute to a worthy cause, or donate your gently used household items to those in need? If so, you can probably claim these gifts as itemized deductions.
There are a few limitations to charitable deductions. First and foremost, you must donate to a qualified organization. Political campaigns don’t count, and you’ll need to get a receipt to support your contribution claim.
There are also dollar amount limits. For cash donations, you can only claim a deduction up to 50 percent of your AGI. For certain private foundations, veterans’ organizations, nonprofit cemeteries, and fraternal societies, this limit is even lower at 30 percent. You’re also limited to a 30 percent AGI deduction for personal property donations.
In order to donate property (such as household goods, clothing, etc.), it needs to be in good, useable condition. You also have to determine the fair market value — you can’t just claim the new value for non-cash donations. If you need help determining the donated item’s value, check out this guide.
2. Home Mortgage Interest
If you have a home (or two), you’re eligible to deduct the interest paid on that mortgage as an itemized deduction. Depending on where you are on your mortgage term, this is likely a substantial amount, too.
The mortgage interest deduction is allowed on the first $1 million of the mortgage. Each taxpayer is allowed to deduct interest paid on as many as two residences, as well.
Lastly, the interest paid on a home equity loan is also tax-deductible, up to $100,000.
3. Investment Expenses
Investing often brings with it a slew of expenses, including legal and professional fees, financial advice, and more. Luckily, many of the expenses involved with these “income-producing activities” is tax-deductible, if you itemize.
You can deduct your investment expenses on the Schedule A as long as they don’t exceed your investment income for the year. Essentially, you can’t report a loss on your itemized deductions based on investment expenses alone. (Claiming a capital loss on the investment value itself is a different matter, though.)
You can deduct expenses such as:
- Fees paid to a bank, trustee, or broker
- Fees paid to collect your investment income, or your dividends on stock shares
- Fees paid to a lawyer, accountant, or clerical help that is necessary to produce taxable income
- Fees paid to a financial/investment advisor
- Monthly bank fees paid in order to enroll in auto-investment services
- Safe deposit box expenses in order to store investment-related documents
- Investment-related publications to which you subscribe
- Office expenses that are strictly used for managing investments and earning income from them
- Online services or software used to manage your investments
You can not deduct expenses such as:
- Investment fees on publicly-traded mutual funds, as these are already deducted from your share and aren’t explicitly paid
- Expenses involved with attending investment seminars, conventions, or meetings (sorry–that trip to the annual Berkshire Hathaway shareholder meeting isn’t going to count!)
- Expenses involved in producing tax-exempt income
- Broker fees paid to acquire investment property (stocks, bonds, etc)*
- Any state or local transfer taxes incurred when you buy/sell securities*
*instead, expenses on both of these are added to the cost of the property
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4. Medical Expenses
These are a bit trickier, from a tax-deductible standpoint, but you can claim your medical expenses on your itemized deduction. The caveat is that you can only claim that which exceeds 10 percent of your AGI (or 7.5 percent if you or your spouse are 65+). This means that if you make $60,000 a year, you can only claim the expenses over and above $6,000.
If you reach your 10 percent AGI limit, there is a large range of expenses that you can deduct. These include:
- Co-pays and doctor’s fees
- Insurance premiums
- Medically-necessary surgery costs (no, cosmetic surgery doesn’t count, unless it was reconstructive)
- Prescriptions
- Expenses related to attending a medical conference for a chronic condition that you, your spouse, or a dependent have (limited to transportation and admission)
- Contact lenses, glasses, or hearing aids
- Crutches, wheelchairs, guide dogs, or other accessibility expenses
- Dental work
- Weight loss programs for those with diagnosed obesity (but special food isn’t necessarily included)
- Alcohol, drug addiction, and nicotine cessation treatment
- Transportation involved with receiving medical care (fares, tolls, parking, and gas/oil)
5. Local, State, and Property Taxes
If you live in a state with its own income taxes, you’ll likely benefit from itemizing. Local (city) or state taxes incurred during the year are deductible on the Schedule A.
You can also deduct any real estate taxes that you paid on your home, as well as personal property taxes that you paid on belongings like your vehicle (a lovely, added expense we have here in Virginia).
You cannot deduct federal income tax, estate taxes, Social Security taxes, homeowner’s association fees, or transfer taxes from the sale of a home, among others.
6. Miscellaneous Expenses
There are a few tax-deductible expenses that don’t fall into any of the above categories, but you can still claim them when you itemize your deductions. They are limited to expenses above two percent of your AGI. Using the example above, where you make $60,000 a year, this means that you would only be able to deduct expenses above $1,200.
These include things like:
- Tax-preparation fees from the year prior
- Home office expenses
- Legal fees
- Job-hunting and interviewing expenses
- Work-related expenses that weren’t already reimbursed
- Subscriptions to professional journals, etc.
- Licensing and regulatory fees
- Union dues
- Uniforms
Depending on how much you make each year and which additional expenses you incur, itemizing your deductions (rather than taking the standard deduction) might be a wise idea. It’s important to do the math (most tax-preparation software can analyze this for you) and see which is the most financially-beneficial option.
As with everything tax-related, you’ll need to keep diligent records and save receipts for everything that you believe to be a deductible expense.
Consult a Tax Pro
The editorial team at Dough Roller knows a thing or two about taxes. Some have taken the standard deduction, others have itemized. We’ve prepared our taxes with software like TurboTax, and we’ve also hired pros.
But we are not tax experts. We’ve done our best to get the above information right. But please consult a tax professional before making any decisions.
Finally, keep in mind that things might change. Legislation is pending that would eliminate many of the itemized deductions and double the standard deduction. We’ve been tracking this legislation here.
Topics: Taxes