How to Itemize Tax Deductions
Itemizing your taxes can seem a little scary at first, if you don’t really understand what it means or what you’re doing. There are two options at tax time for reducing your tax liability: you can take the standard deduction or you can itemize your actual expenses to figure out your tax deduction.
Itemizing could lower your tax burden significantly, in certain situations. Start with this beginner's guide to see if you want to try itemizing your own taxes.
What is Itemizing and What Does it Do?
At its simplest, itemizing means making a list of tax-deductible expenses that you paid throughout the year, and including them on your income taxes to receive a tax deduction. If after making a list of possible deductions you find that your itemized deductions aren’t greater than the standard deduction, you can simply take the standard deduction on your taxes – unless you do not qualify for the standard deduction.
You are not eligible for the standard deduction if the following pertains to you:
- You changed your annual accounting method and will be filing a tax return for a period of less than twelve months
- You are married but filing taxes as “married filing separately”; and your spouse itemizes deductions
- You’re a dual-status alien or a nonresident alien.
Depending on your unique situation, the standard deduction could actually give you a bigger tax break than an itemized list of deductions. It just depends on what you spent your money on last year.
What Expenses Can You Itemize?
There are a slew of expenses that you can potentially itemize. The typical person who owns a home and has retirement accounts usually finds that they can itemize his or her home mortgage interest, investment interest expenses, property taxes, and state and local income taxes.
Other commonly used deductions include charitable donations. There are also plenty of miscellaneous deductions. If you, your spouse, or your child attended college, for instance, you can deduct tuition and fees.
The Details of Itemizing
This probably sounds quite simple. Anyone could make a list of their tax deductible expenses, tuition costs, and charitable donations.
It does, however, get quite a bit more complicated than simply making a list of deductible expenses. For instance, you can only count your medical expenses if they are at least 7.5 percent higher than your adjusted gross income. That usually means that you went through some pretty serious treatments that cost a lot of money.
To make matters just a little more complicated, you cannot include cosmetic procedures. That might sound easy, but there are some procedures that sit on the line of necessary and cosmetic. This can make it difficult for someone to determine whether they can take the deduction.
Some Parts of Itemizing Are Easy
Itemizing and deducting medical expenses might sound difficult, but not every aspect of itemizing makes you think so hard.
Charitable contributions, for instance, are extremely easy to itemize and deduct. You simply add the total amount that you donated to qualifying organizations during the year. As long as you didn't contribute more than 50 percent of your adjusted gross income (AGI), you can include the entire amount as a deduction (30 percent for property donations such as houses, cars, and furniture).
Don't let complicated tax instructions deter you. Just follow them step by step and you can itemize your deductions, even if it takes a couple hours to get the job done. You have many options for figuring out your taxes – from using the old fashioned paper forms and written instructions to working with tax software or a tax professional.
Claiming Your Itemized Deductions
Once you itemize your deductions, you need to know how to claim them.
Assuming that you're using IRS Form 1040, you will need Schedule A to calculate your deductions. You also need to indicate on the 1040 that you want to take an itemized deduction rather than the standard deduction.
Schedule A gives you step-by-step instructions that will make it easier for you to calculate your deductions. It sounds complicated when speaking about it abstractly, but it becomes much easier when you have the forms right in front of you with all of your financial data. You will literally just enter the total amount of each type of deduction on the corresponding line.
You can make things easier for yourself by keeping detailed records of all of your eligible tax deductions throughout the year. That way, when it comes time to file your income taxes, you can easily see whether you have a higher deduction by itemizing your expenses or by taking the standard deduction.
Remember that it only makes sense to take the itemized deduction if it is larger than the standard deduction. If the standard deduction is larger, you don't even have to worry about itemizing since you’ll save more money with the standard deduction.