To itemize or not to itemize? That is the question

December 15, 2021 admin

Misconceptions can easily happen when it comes to filing taxes, but some aspects of income tax preparation have more than their fair share of misunderstandings.

The largest breeding ground for misconceptions? Discrepancies over rules: The actual IRS rules versus the rules according to your best friend. The rules that you hear from others include timeless classics such as, “only the wealthy itemize” or “itemizing is the only way to get your full refund,” both of which are false.

There are plenty of deductions that you can take without itemizing, including:

IRA contributions: Up to $6,000 if you are under age 50, $7,000 if you are age 50 or older.
Student loan interest: Up to $2,500 if your modified adjusted gross income is less than $85,000 for singles and $170,000 for married couples filing jointly.
Alimony: You can deduct court-ordered payments to your separated/divorced spouse. This does not include child support.
Penalties on early savings withdrawals
Employee moving expenses: If you moved at least 50 miles because of a change in your job location.
Health Savings Account contributions
Self-employed health insurance: If you are self-employed, you can deduct health insurance premiums (income limits apply).
Retirement plan contributions: If you are self-employed, contributions to plans such as SEP-IRAs, Keogh plans, and solo 401(k) plans may be deductible.
Half of your self-employment taxes: 50% of your Social Security and Medicare contributions.

The standard deduction

This is a flat amount the IRS allows you to deduct from your income regardless of your actual deductible expenses.

It’s important to know what the current standard deduction is before deciding if you should itemize because it changes every year. When you file your 2021 taxes during 2022, the amounts will be: $12,550 for single individuals or married individuals filing separately; $25,100 for married couples filing jointly; and $18,800 for heads of households.

Also: Five ways you’re asking for an IRS audit this tax season

Itemized deductions

You should itemize your deductions if the amount of your deductible expenses is greater than your standard deduction. The advantage of itemizing is that you will be able to reduce your taxable income by more than your standard deduction.

If you think itemizing your return will be necessary, save your canceled checks, receipts, and statements so that you can tally them at the end of the year — and have a paper trail in the event the IRS questions your deductions.

Itemized deductions include:

Medical and dental expenses: You can deduct these expenses if they exceed 7.5% of your adjusted gross income. Medical and dental expenses include the insurance premiums you pay.

Deductible taxes: There are four types of non-business taxes you pay that are deductible:

State, local, and foreign income taxes
State and local real estate taxes
State and local personal property taxes
State and local general sales tax

Home mortgage points: Any discount points that you paid during the previous year on a home loan or refinance of your mortgage; origination points are not deductible.

Interest expenses: Interest that you paid on certain types of loans is deductible, including mortgage interest. Nondeductible interest includes autos for personal use and credit card interest.

Charitable contributions: This does not include direct payments to individuals.

Business use of home: Whether you are self-employed or an employee, if you use a portion of your home for work, a portion of your household expenses is deductible. But exercise caution with this deduction, as its frequent abuse raises a red flag to the IRS.

Business use of car: If you use your car for your job or business, you may be able to deduct either actual expenses or the standard mileage deduction of 56 cents per mile. Commuting is not considered business use.

Business travel expenses: Generally, if you have to spend the night away from home for work or business, a portion of your expenses may be deductible.

Business entertainment expenses: Entertainment expenses that are both ordinary and necessary to your business or trade may be deductible. There are very strict rules as to what is allowed.

Educational expenses: This includes expenses such as continuing professional education or education that maintains or improves your job skills.

Employee business expenses: This includes things like tools or uniforms that are required for your job that are not paid for by your employer. It does not include clothing items that can be worn outside of work, such as suits.

Losses to casualty or theft: Expenses that are the result of theft or damage from an accident that are not covered by insurance may be deductible.

You’re on your own

The decision about whether or not to itemize is up to you. In most cases, a professional tax preparer, such as a CPA, can review your expenses and make a recommendation.

When using a tax professional, however, you should consider the added cost of itemizing, since most will charge an additional fee to prepare a Schedule A. Since itemizing is never required, you should consider whether or not the savings on your tax bill are greater than the additional cost of itemizing.

[This article originally appeared on the Simple Dollar in September, 2019. It was updated in December, 2021.]

Source link