Should You Itemize When Preparing Your Tax Return?
Though everyone groans about having to pay taxes, the government is nice enough not to tax U.S. citizens on the full amount of their earnings.
There are two big buckets of deductions the government provides: The first are called above the line, and the second are called below the line. (The “line” these deductions refer to is a literal line on your 1040 form for the Adjusted Gross Income.)
Below the Line Deductions
Below the line deductions come in two types: One is called the standard deduction, and the second is called itemized deductions.
The Standard Deduction
The standard deduction is an amount of income that the government will not tax any taxpayer on. Most people take the standard deduction on their returns, which is worth anywhere from $5,950 to $11,900, and opt out of the whole process of itemizing.
It’s as simple as saying, “I’m a single person (or married filing singly, or married filing jointly), and yes, I would like the standard deduction.” For some people, this is just fine. After all, that’s a lot of money, and taking just the standard deduction makes your taxes simpler and faster. What’s not to like?
(Check out the following chart to find out what the standard deduction is for your filing status.)
|If Your Filing Status Is. . .||Your Standard Deduction Is:|
|Single or Married filing separately||$5,950|
|Married filing jointly or Qualifying widow(er) with dependent
|Head of household||$8,700|
Itemizing your deductions means listing out each deduction you qualify for. People do this when the sum of all their deductions is greater than the standard amount. Some things people might itemize include medical expenses, large charitable donations and mortgage interest payments.
But How Do You Know Which One is Right for You?
At stake in this decision are savings in terms of money and time. For some people, taking the time to itemize could save them hundreds or thousands of dollars in taxes. On the other hand, people who don’t take the time to itemize could miss out on tax savings.
The most recent study in 1998 by the General Accounting Office estimated that 2.2 million people overpaid their taxes because they chose not to itemize. It seems many wrongly take the standard deduction because it’s easier; people forgot to keep records during the year or assume they don’t have any deductions.
Then again, there are the people who decide to itemize even though it’s not worth it. They just made their lives needlessly more complicated (and expensive, if they relied on an accountant to do this for them) for no real financial benefit.
Read the rest of the article on LearnVest.com.