(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. If you have enough of them, they can add up to save you more money than you’d save by taking the standard deduction.
For example, let’s 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? If you’re both single filers with all other things being equal, you’ll pay $4,646.25 in federal income taxes for 2014. He’ll pay just $4,046.25. You can probably think of a few uses for that extra $600!
Each deduction lowers 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.
Completing the Form
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 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 – You can deduct several taxes from your income for federal tax purposes, including 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 organizations will furnish you with relevant tax forms at the end of the year. For instance, your mortgage carrier will provide you with Form 1098. But you’ll want to keep track of other expenses, like medical bills and charitable gifts, throughout the year.
During the year, you’ll also want to remember these allowable deductions when making financial decisions. If you’re thinking about donating to charity, for instance, consider that when you donate a dollar, you’ll really only pay between 67 and 85 cents when you itemize your taxes. And if you buy a new car, you might only pay $75 on $100 of property taxes.
You can never get back all your money by deducting an expense when you itemize your taxes. But understanding your deductions will help you plan. And the best laid plans usually offer the best results.