November 7, 2024
How to decide which tax filing approach is right #CashNews.co

How to decide which tax filing approach is right #CashNews.co

Cash News

Tax season has arrived, and with it comes the age-old question: to itemize or not to itemize? Every year, millions of American taxpayers decide whether to take the standard deduction the Internal Revenue Service (IRS) offers or to claim itemized deductions to maximize tax savings.

Let’s look closer at how tax deductions can lower your tax bill and which taxpayer situations promise to make the extra hassle of itemizing deductions pay off.

Read more: Taxes 2024: Everything you need to file your taxes on time

The standard deduction is the deduction most taxpayers claim. It simplifies tax filing, using a specific amount set by the IRS that is deducted from your taxable income according to your filing status.

The standard deduction lets you reduce your taxable income even if you don’t have any deductible expenses and is adjusted every year to account for inflation. As the IRS website states, you may also be eligible for additional deductions if you’re blind, disabled, or over 65.

Although taking the standard deduction is easier because it doesn’t require tracking expenses, claiming this more straightforward option could result in a higher tax bill if you have deductible expenses that add up to a bigger break.

Read more: What is taxable income?

Single taxpayers or head of household filers who are 65 and older can take an additional standard deduction of $1,850 on top of the standard amount. Married couples filing jointly who are over 65 are eligible for an additional $3,000 in deductions. Blind taxpayers can also deduct more money depending on their age and filing status.

While few taxpayers choose to do so, the IRS allows you to pick from a menu of individual deductions that can ultimately add up to a lower tax bill than if you took the standard deduction. That’s known as itemizing.

The rub is you can’t take both the standard deduction and itemize at the same time, so you’re forced to pick an approach and stick to it. While itemizing deductions can seem intimidating, most tax software walks taxpayers step-by-step through the process.

Itemized deductions are sometimes referred to as below-the-line deductions. For tax purposes, “the line” is your adjusted gross income. So below-the-line deductions are adjustments you’re allowed to make after calculating your taxable income.

Above-the-line deductions are adjustments you’re allowed to make before you calculate AGI and you can take them whether you choose to use a standard deduction or itemized deductions. A few common above-the-line deductions include student loan interest, retirement and health savings account contributions, educator expenses, and qualified business income.

Just remember, when you’re talking about itemizing, you’re dealing with below-the-line deductions.

Read more: Tax credit vs. tax deduction: What’s the difference and which is better?

It pays to learn more about which deductions you’re eligible for. Here are a few common itemized deductions. You should review the rules for each deduction carefully to determine your eligibility, or consult a tax pro.

If your medical bills total more than 7.5% or your adjusted gross income (AGI), then you may be eligible for an additional deduction. This includes prescription drugs, payments for telehealth or hospital care, dentures, and much more.

Medical expense deductions can also apply to self-employed individuals who can claim unreimbursed related work expenses or pay their own health insurance premiums.

If you financed a home or second home, you’re probably eligible for a deduction on your home mortgage interest. Limitations apply, however: The IRS only allows deductions on mortgage interest up to the first $750,000 for married couples or $375,000 for those taxpayers who file separately.

Your charitable donations can be tax-deductible but there are some caveats. The charity that benefits from your bounty must be an IRS-recognized organization and you can only deduct a portion of your adjusted gross income (usually about 60%).

Use the IRS Tax Exempt Organization Search here to determine if your charitable donation qualifies.

If you live in a state with steep property taxes, there is a silver lining. Using what’s referred to as the SALT cap, homeowners can write off up to $10,000 in personal property taxes as well as state and local taxes, local sales tax, and in some cases even state income taxes.

Sometimes the worst does happen. When it does, the IRS offers a deduction to cover casualty losses, which includes theft losses. There are a few rules for claiming this deduction, including that the loss has to have occurred through a sudden event or disaster such as an earthquake, hurricane, tornado, flood, or fire.

Keep in mind that the IRS provides a wide array of other types of less common itemized deductions (yes, you can actually deduct your gambling losses) that may pay off in specific tax situations or during certain tax years.

But itemizing in general has become much less common since the passage of the 2017 Tax Cuts and Jobs Act, which substantially increased the standard deduction and prompted millions of people to dispense with itemizing.

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Still debating whether to take the standard deduction versus itemized deductions? Here are advantages (and a few disadvantages) of taking the simple route in preparing your taxes.

Pros:

Cons:

Think you should take the plunge and itemize your taxes this year? There are a few situations where it makes sense, especially if you already have to itemize for local taxes. Here are a few other reasons to itemize plus one big reason not to.

Pros:

Cons:

There’s no way around it. Itemizing your taxes requires more work, both in keeping records and receipts throughout the year and in preparing your taxes. However, spending that time could pay off — both in a bigger tax refund and empowering you to more closely manage your finances.

It can be tough to know off the top of your head that your itemized deductions are going to total more than the standard deduction. So before you sit down with your Schedule A (Form 1040) and a calculator, here are a few specific situations where it usually makes sense to itemize your taxes.

There’s not much wiggle room on this one. If your spouse files itemized deductions, the IRS says you’ll have to do the same. So gather your bank statements and tax forms and consider a professional to help with tax preparation.

Many people who financed a home pay enough in mortgage interest alone to equal more than the standard deduction. You’ll need a Form 1098 from your mortgage provider to prove the exact amount of paid interest.

Food banks, clothing drives, relief funds for nonprofit organizations, and church tithing can add up over the course of the year. But keep in mind that the IRS requires documentation for any donation that totals more than $250.

If your medical or dental expenses not covered by insurance totalled more than 7.5% of your adjusted gross income, many of those costs will be tax deductible. This applies not just to doctors fees but also purchasing glasses, prescriptions, and even long-term care expenses.

If you suffered significant property damage as a result of a disaster, you’re probably going to be able to claim a casualty loss deduction. Losses just need to total more than 10% of your adjusted gross income.

If you shelled out plenty to your state or city for local income taxes, property tax, or sales tax, that amount may be deductible up to $10,000. If you plan to claim deductions for sales tax, be sure to save your receipts throughout the year.

Read more: What to expect for the 2024 tax filing season

As a general rule, you should take the deduction that ensures the biggest refund regardless of your adjusted gross income. However, if your earned income in the last tax year bumped you up a tax bracket, you may want to pay closer attention to itemized deductions that could maximize your tax savings.

Sometimes, but not always. Itemizing your taxes can result in a bigger refund, but make sure you understand the rules for the allowable deductions and that you have documentation to qualify. Otherwise, you’ll risk getting a notice you’re being audited instead of watching that four-figure direct deposit roll into your bank account.

Yes. The IRS specifies you can either use the standard deduction amount for your filing status or itemize deductions, but not both. So, if you choose the standard deduction, you lose your opportunity to itemize. Remember that sometimes you may be eligible for a higher standard deduction if you’re blind or over 65, and no one can claim you as a dependent.