Welcome to the topic “Should I Opt For Itemized Deductions?”
You have the option of accepting the standard deduction or itemizing your deductions when filing your taxes each year.
The standard deduction is a fixed amount that you can deduct each year from your taxable income. This amount varies depending on your tax filing status and is adjusted annually to account for inflation.
Prior to the implementation of the TCJA, millions of people could itemize their deductions on their tax forms and claim a more significant deduction. This may no longer be necessary due to the increased standard deductions.
Read on to determine when to itemize your deductions and when to take the standard deduction to get the most out of your tax return. However, it can be said that itemizing makes the greatest sense for higher-income individuals with many substantial costs to deduct.
What Are Itemized Deductions?
State and local earnings or sales taxes, real estate taxes, personal property taxes, mortgage interest, and disaster losses from a federally declared disaster are all itemized deductions. Donations to charitable organizations and a portion of your medical and dental expenditures may also be included.
Itemized deductions are deductible expenses that individuals can claim on their federal income tax returns to reduce their taxable income. They can be claimed in lieu of a standard deduction if one is available.
An itemized deduction is a cost that can be deducted from your adjusted gross income (AGI) to lower your taxable income and hence lower your tax liability.
Taxpayers who qualify for these deductions can pay less in taxes than if they used the standard deduction, which is a fixed cash amount that varies only by filing status. Mortgage interest, charity gifts, and unreimbursed medical expenses are all itemized deductions that are occasionally subject to limits.
Your taxable income is reduced by itemized deductions. The amount saved is determined by the tax bracket of the filer.
Schedule A of Form 1040 lists itemized deductions. If you are audited, you must keep all receipts in case the IRS requests them. Bank statements, insurance bills, medical bills, and tax receipts from approved charitable organizations might all be used as further proof of spending.
A change in the tax legislation substantially doubling the standard deduction between 2018 and 2025 has made itemizing tax deductions less favorable for many individuals.
Opting For Itemized Deductions
The overwhelming bulk of taxpayers have the option of itemizing deductions or claiming the applicable standard deduction. Nonresident aliens, who must itemize, and married couples filing separately, who must both claim the same type of deduction, are the only exceptions.
Each year, you must decide whether to itemize your deductions or take the standard deduction. It would be best if you always did your homework before making that decision, as the permissible deductions and their amounts can fluctuate from year to year.
The choice should be based on which deduction type reduces your tax liability the greatest.
The list of costs that can be itemized is long, but there are additional limits and exclusions when compared to the deductions available before the Tax Cuts, and Jobs Act took effect.
Itemizable Deductions
The following is a list of the possible deductions that can be itemized:
- Mortgage interest on the first $750,000 of debt—or $1 million if you purchased your house before December 16, 2017—is tax-free
The first $750,000 in mortgage interest is tax-deductible. Mortgage lenders provide Form 1098 to borrowers every year, detailing the exact amount of deductible interest and points they paid in the previous year.
Within certain limitations, taxpayers who bought or refinanced a property during the year can deduct the points they paid.
- Contributions to charity
Within certain limits, any donation to a recognized charity is tax-deductible. The amount that can be deducted for monetary contributions between 2018 and 2025 is limited to 60 percent of the taxpayer’s AGI. Excess funds must be carried forward to the following year.
Depending on the type of property and organization receiving your donation, your other contributions may be limited to 50 percent, 30 percent, or 20 percent of your AGI.
- Expenses for medicine and dentistry
This is likely the most difficult—and financially costly—deduction to qualify for. Taxpayers who have out-of-pocket medical and dental costs that are not covered by insurance can deduct up to 7.5 percent of their adjusted gross income.
- State and local income, plus up to $10,000 in personal property or sales taxes
- Losses from gambling
This falls into the Other Miscellaneous Deductions category, where gambling losses to the extent of gambling winnings can be deducted, among other expenses.
- Interest on investments
If your allowed itemized deductions exceed your standard deduction, or if you can’t take the standard deduction, you should itemize.
It is to be noted, however, that if you meet the following criteria, itemizing on Schedule A (Form 1040) PDF may be beneficial to you:
- You won’t be able to claim the standard deduction, or the amount you can claim is limited
- Had a lot of uninsured medical and dental bill
- Had a lot of Other Itemized Deductions
- Had a lot of uninsured casualty or theft losses from a federally declared catastrophe
- Contributed generously to deserving causes
Non-Itemizable Deductions
The following is a list of deductions that cannot be itemized:
- Unless you purchased your property before December 16, 2017, mortgage interest is charged on loan amounts over $750,000.
- Exceeding $10,000 in state and local income, sales, and personal property taxes
- Employee expenses that are not reimbursed
- Expenditure for tax preparation
- Losses due to natural disasters – only if you are in a federally declared disaster area
Conclusion
There are many situations when itemized deductions can surpass the standard deduction due to additional deductions realized from excess medical or job-related expenses.
As a result, you should not assume you won’t be able to deduct miscellaneous costs or that you won’t be able to itemize deductions if your itemizable deductions are inadequate to qualify you.
This article does not cover all of the rules that apply to itemized deductions. Working with a knowledgeable and skilled tax preparer will help ensure that those requirements are followed when preparing your tax return.
You should be able to determine whether you should itemize or take the standard deduction with the help of your tax preparer. Take some time to think about what to expect from 2018 to 2025 as a result of the new tax legislation.
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Also Read: An Overview Of Tax Exemption
