Hello everyone,
If you are someone who chose the standard deduction on your individual U.S. federal tax return (about two-thirds of all taxpayers choose this option over the itemized deduction), then this article might help to save you more money.
In my Tax Series #9, I compared the standard vs. itemized deductions at a high-level. Now, let's delve into what these itemized deductions really are, so you can see for yourself if you might want to itemize on your next return (for those of you who filed an extension for this October filing, this article might save you money now!).
Itemized deductions go on Schedule A (which is separate from the main 1040 schedule) and consist of the following:
Charitable donations: cash contributions to qualified charities (religious organizations are included) are fully tax deductible, up to 50% of your adjusted gross income (30% if you contributed property). Just in case the IRS may ask for it, it is always a good idea to request a document from the charitable organization that proves the amount of contribution as well as the tax-qualified status of the organization (usually in the form of a Tax ID number). Lastly, if you received any compensation in return for your contributions, you must subtract that from the tax deduction that you are requesting from the IRS.
Unreimbursed Medical and Dental Expenses: if you had large medical/dental expenses that were NOT reimbursed by the insurance carriers, then you can deduct these amounts for the amount above 10% of your adjusted gross income. For example: let's say that you had 10,000 dollars in medical expenses and you did not have a medical insurance plan. Also, your adjusted gross income for the year was 60,000 dollars. 10% of 60,000 = 6,000 dollars. The deduction would be 10,000 dollars of unreimbursed medical expense, minus the 10% threshold of 6,000 dollars, to equal 4,000 dollars of tax deduction. Makes sense, right? Think of the 10% as a hurdle that you need to jump over first, before deducting taxes. Added bonus if you are a senior: if you are age 65 or over, the hurdle lowers to 7.5% of adjusted gross income.
Mortgage-related Payments: mortgage interest and property taxes are fully tax deductible, without limitations! This one is huge; if you own a residential real estate property (primary residences and second homes are qualified), it is likely that you should go with itemized deduction on this basis alone. Even PMI (private mortgage insurance) can be tax deductible (notwithstanding income phase-outs for PMI).
State and Local Taxes: this one is also big. If you pay state and local income taxes, all of that is tax deductible on your federal 1040 return. If you do not pay state/local income taxes, you can deduct sales tax that you paid for items throughout the year. Use the IRS Schedule A pamphlet to figure out the right sales tax calculation (basically, you would list big-ticket purchases and apply a sales tax rate).
Gambling Losses: did you bet big on Always Dreaming to win the Kentucky Derby this year? If so, you probably had a portion of your winnings withheld at the ticket window, and were informed that the racetrack will submit a Form W-2G to the IRS. That means that they will declare your gambling winnings as income to the IRS. Oh shoot! But then you remembered that you spent thousands of dollars on lottery tickets (and won nothing). Great! Now we can offset your horseracing winnings by the amount spent on lottery tickets! In short, gambling losses are tax deductible up to the amount of gambling winnings.
Theft and Casualty: if you experienced a natural disaster that destroyed your belongings, and only some of the loss was insured, then the unreimbursed damages can be tax deductible IF you meet a 10% threshold (on adjusted gross income) plus $100 per event. Also, theft is included in this category. Again, think of the threshold as a hurdle that you need to jump over before benefits kick in.
Miscellaneous Expenses: this is a catch-all category that includes things like tax preparation fees, unreimbursed employee expenses, and dues/subscriptions to trade journals, licensing bodies, etc. Unfortunately, there is a 2% threshold (on adjusted gross income) to overcome, before you can start deducting. For example, if your adjusted gross income is 50,000 dollars, the 2% threshold = 1,000 dollars. If you had miscellaneous expenses that totaled only 500 dollars for the year, then there is nothing to deduct since you did not meet the minimum threshold of 1,000 dollars. Still, this can be a valuable benefit for service professionals who are self-employed and have many licensing requirements.
I hope that this deep dive helped you to understand more about itemized deductions; if you chose standard deductions in the past (for convenience), but have had many of the above items in your financial situation, you might want to take a second look by amending your past returns. For details on that, check out my Tax Series post #1: Amended Tax Returns.
If you are not sure about something, as always, I am here to help. Feel free to reply with your questions and I will guide you in the right direction. Thanks for reading!
If you like my tax series, check out my previous posts below:
Tax Series #11: Beware of Tax Identity Theft
Tax Series #10: Child Tax Credit
Tax Series #9: Standard Deduction vs. Itemized Deduction
I also started a new series on personal finance below. Check them out too!
Personal Finance Series #6: Retirement Planning
Personal Finance Series #5: How to Get a Pay Raise
Personal Finance Series #4: Investment Advice - Part Two
Personal Finance Series #3: Investment Advice from Warren Buffett
Personal Finance Series #2: Top Money-Saving Tips
Personal Finance Series #1: Money Management 101
About the Author : I am a cryptocurrency enthusiast and a U.S. Certified Public Accountant with over 15 years of experience in accounting, taxation, and finance.
If you like this series, please follow me @qwesttexas. I am here to help the Steemit community with tax and finance questions, and break down confusing tax jargon into plain English so that we can all benefit from it. Let's go Steem!