When the government passed the Tax Cuts and Jobs Act (TCJA) in 2018, it changed the standard deduction amounts for income tax purposes.
This change led to fewer people using itemized deductions on their taxes, as they could receive more savings by using the standard deduction.
Itemizing your deductions might still be the right move for you, though, if you are eligible to itemize. If you aren’t sure what this means or how to do it, continue reading to learn all the details about itemizing your tax deductions.
Itemized Deductions vs. Standard Deduction
When you earn money in any way, you must file a tax return by April 15th of the following year. When you file yours, you must include all the income you earned for the year.
The point of including your income is to ensure that you pay the right amount of taxes on your income. Fortunately, you won’t have to pay taxes on all your income, though, as you can subtract your deductions.
You get two choices for your deductions. The first option is using the standard deduction.
For the year 2020, here are the standard deduction amounts you can use based on your filing status:
- $12,400 for a person filing single
- $24,800 for a married couple
- $18,800 for a person filing head of household
The other option is to use itemized deductions. When you itemize, you do not get to write off the standard deduction. Instead, you can write off the total expenses you actually paid during the year.
To do this, you must list each qualifying expense on your tax return and the amount.
If you aren’t sure which deduction is more beneficial for your situation, add up your itemized deductions. If your itemized deductions are higher than the standard deduction, you should itemize. If not, then choose the standard.
The Benefit of Deductions
The IRS provides ways to save money on your tax bills, and one of these ways is through deductions. When you deduct qualifying expenses, you lower your annual income tax.
Suppose you are married and earned $60,000 this year. If you take the standard deduction of $24,800, the IRS taxes you on an income of only $35,200 instead of $60,000 because of the allowable deductions.
You’ll pay lower taxes on $35,200 than on the full income you earned. Therefore, saving money on your taxes is the primary benefit of deductions.
Common Expenses You Can Itemize on Your Taxes
Now that you understand the purpose of deductions and the two methods you can use, you might want to know what expenses you can itemize.
Here is a list of the most common types of expenses people itemize:
Home Mortgage Interest
The IRS lets you write off the amount of money you paid to your lender for mortgage interest. The interest you write off only applies to the amount you spent for the home you live in right now.
If you have a vacation house or a rental property, you can’t write off the mortgage interest on your itemized deductions. You might, however, be able to write it off in a different area of your taxes.
For example, if you have a rental property business and use 1099 state filing forms, you might be able to reduce your rental income by writing off interest paid on rental properties. You should ask your tax professional to find out.
Home Property Taxes
When itemizing, you can also include the amount you spent on your property taxes. Again, this only includes the amount you paid for the home you live in right now. It does not include other properties.
You can usually find the amount for your interest and property taxes on the Form 1098 your lender mails you at the end of the year.
Medical and Dental Bills
Additionally, people who spend a lot of money on medical and dental bills can write off part of the money they spent. You can only write off the amount you spent that exceeds 7.5% of your adjusted gross income (AGI).
Therefore, if your AGI is $50,000, you can’t write off any medical expenses until you spend $3,750 on medical or dental bills. You can write off any money you spent above this amount.
If you spent $10,000 on medical bills this past year, you could itemize $6,250 on your taxes.
Donations to Charity
You are also allowed to write off any contributions you made to charitable organizations during the year. You can write off money you donated to churches or nonprofit organizations.
You can also write off gifts you donated, such as clothing, goods, or services.
State and Local Taxes You Paid
The IRS lets you write off the state and local taxes you paid when you itemize your deductions on your federal return. You can often find these amounts on your W-2 statements or pay stubs.
In some cases, you might have the ability to write off the money you spent on education expenses. You’ll need to ask your accountant to help you determine if you meet the criteria for this write-off.
Finally, you can write off expenses you paid for that relate to your job, as long as your employer didn’t compensate you for them.
For example, if you purchased uniforms for your job, you might be able to write off the amount you spent buying them. You can also write off many other work-related expenses, including gas, tolls, and parking fees.
There are several other expenses you can write off when itemizing your deductions. If your itemized deductions are higher than the standard deduction, you’ll save more money on your tax bill.
Seek Tax Help From an Expert
Using itemized deductions can help you save money on your taxes if you qualify. If you aren’t sure which to use or how to itemize, talk to a tax expert.
Paying taxes is a part of life you can’t get around, yet using the right deductions can help you cut your tax bill.
If you enjoyed learning about itemized deductions, you might enjoy other tax-related topics on our blog. Check it out today!