Do you want to reduce your income tax? Then look carefully at the IRS’s allowable tax deductions. Deductions are subtracted from your adjusted gross income (AGI), determining the amount of tax you actually owe Uncle Sam. The IRS allows two ways to take deductions: the standard deduction or by itemizing certain deductions using Schedule A. But, how do you know when to itemize or when to take the standard deduction?
If the standard deduction for your age, income and filing status exceeds your itemized deductions, use the standard deduction. For 2014, the standard deduction for couples filing jointly is $12,400, for singles or married couple filing separately is $6,200, for head of household is $9,100. Those limits are higher if you are over 65 or blind.
To determine if you should itemize, you’ll need to keep good records and add up what you paid for things like:
- mortgage interest and mortgage insurance
- real estate and personal property taxes
- theft and disaster losses
- gifts to charity (with some limitations)
- sales tax (if your state doesn’t collect income tax)
- a portion of your medical and dental expenses (must exceed 10% of your AGI)
- certain miscellaneous expenses related to your job (but these must exceed 2% of your income)
So, for example, if you are married filing jointly, in your 20’s or 30’s, have a newer mortgage where you’re paying more interest than principal, paid a lot of out-of-pocket (uninsured) medical expenses for the kids, and paid property taxes on that new boat, you may very well benefit from itemizing your deductions.
If you are 72 and retired, the house is paid off, Medicare and your supplemental insurance cover most of your medical expenses, then you may benefit more by taking the standard deduction.
Whether you itemize or take the standard deduction may change from year to year, depending on your circumstances. Be aware that some taxpayers are not allowed to take the standard deduction, even if it is higher than itemizing. So, check your eligibility here. As with most tax rules, there are exceptions to or limitations on many deductions, so be sure to check the IRS rules or consult your CPA. Often your CPA can find deductions that you simply missed.