Deciding whether to Itemize Your Tax Deductions
What can you safely deduct on your taxes? You’re entitled to the larger of the standard deduction or your itemized deduction. If you don’t own a home or aren’t making large charitable contributions, you may be best served by taking the standard deduction. The standard deduction is every taxpayer’s minimum gift from the IRS. However, if you don’t qualify for the standard deduction, generally because someone else — like your parent — claims you as a dependent on his or her tax return, you have significant medical or dental expenses, pay interest or real estate taxes on your home, or make large charitable contributions, you can save a substantial amount of money by itemizing your deductions.
Use the following list to determine whether itemizing may benefit you. The more items that apply to you, the more likely itemizing will be a good idea. However, if you pay home mortgage interest, that alone may be enough to warrant itemizing.
Mortgage Interest (Use Form 1098 received from lender in January of each year):
Do you pay a mortgage on your primary residence?
Do you pay a second mortgage on your primary residence?
Do you have a home equity line of credit?
Do you pay a mortgage on second home/vacation home?
Do you have any other mortgages?
Do you have discount points paid on mortgage?
Points that you pay when you initially buy your primary residence are deductible in that year. However, if you refinance or the property isn’t your primary residence, points are deducted gradually over the life of the loan.
Real Estate and Property Taxes (keep receipt of taxes paid):
Did you pay real estate taxes on primary your residence?
Did you pay real estate taxes on a secondary residence?
Did you pay property taxes paid on personal property?
State and Local Income Taxes:
Did you make estimated state and local tax payments?
Were any state and local tax refunds from prior tax year applied to current year’s liability?
Did you make any cash donations?
Did you donate any property?
Medical Expenses (must exceed 7.5 percent of adjusted gross income [AGI] to be deductible):
Deductible medical expenses include medical insurance premiums you pay, doctors’ fees, hospital and lab fees, prescription drugs, medical supplies, dental and vision care costs, and supplies.
Although medical expenses are deductible, you likely won’t get to deduct these expenses because they must exceed 7.5 percent of your AGI to apply.
Miscellaneous Tax Deductions (must exceed 2 percent of AGI to be deductible):
Did you pay union or professional dues?
Did you pay for subscriptions for work-related publications?
What was the cost of uniforms or equipment required for employment?
What was the cost of continuing education required for employment?
Did you pay any IRA custodial fees?
Did you pay for a safe deposit box rental?
Did you have any investment advisory and tax preparation fees and expenses?
Did you pay for books and periodicals you used in managing your investments?
Did you pay legal fees for issues involving your job, taxes, or investments?
This isn’t an exhaustive list, but it covers the majority of items that likely apply to you. For more information, or if you’re just having trouble getting to sleep, read IRS Publication 529.
Itemized deductions are limited or phased out if your AGI exceeds $156,400 for single, married filing jointly, and head of household taxpayers ($78,200 for married filing separately). Unfortunately, you can do little if you find that your itemized deductions are limited or phased out because of your income being too high unless you anticipate your earnings dropping significantly next year. If that is highly likely, you’d be best served by postponing any payment of tax-deductible items until next year, if possible, when your deductions won’t be limited.