Are you looking to know about itemized deductions? Then this article is made for you. It also incorporates some essential aspects such as its benefits, drawbacks, and advice on if you can go for it.
What they are? They are alternative tax deductions that allow you as a taxpayer to list tax and expenses one by one rather than going for standard deductions. It enables you to reduce your annual income tax bill above what standard deduction can offer.
Therefore, if you are looking for a way to lower your taxable income and increase your tax saving, then you only need to itemize your deductions. One of the amazing things about itemizing is that you can claim a higher deduction that you can’t find from a standard deduction. However, for a successful itemization, you must complete Schedule A form, file your tax return, and maintain all your expense records.
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Categories of Itemized Deductions
They are grouped into:
- Tax you paid
- Medical and dental expenses
- Interest you paid
- Casualty and theft losses
- Gifts to charity
Apart from these five categories, there exists another line of deductions. However, this line only covers minor or less common scenarios, such as unrecovered pension investments and gambling losses.
The most significant percentage of states, people, and local taxes include charitable donations and mortgage interest in their itemized deductions.
Before 2018, taxpayers could include miscellaneous deductions such as union dues and work-related travel expenses. However, after the new revision, such expenses ceased from being deductible for federal tax, but we still have some states that allow them.
Benefits of Itemized Deductions
1. Claiming More Expenses
In the time of itemization, the IRS allows some expenses such as property taxes, mortgage interest, and medical bills. Some of these categories are limited to a certain point or have caps. So, taxpayers that hold massive mortgages and give generously to charity organizations may benefit by landing into more substantial tax deductions through itemizing.
2. Saving More Money
You can include lots of deductions while itemizing. In that, you can be lucky to earn a higher tax refund.
It’s important to know that your tax bracket determines the amount you save by itemizing. Let’s assume that your income is taxed at the 35% tax bracket. Here, you’ll receive a tax saving of 35 cents for each dollar you itemize above the standard deduction.
As good as you can claim more expenses and save some more money, there are some disadvantages to itemizing.
Drawbacks of Itemized Deductions
1. Requires More Paperwork and Lots of Effort
For you to perform itemization, you must document expenses and tally all your expenses. What does that mean? It means that itemizing is a manual procedure that calls you to include lots of paperwork, unlike standard deductions.
Also, if you keep a lot of records and you deal with many deductions, it can consume a lot of your time. Even worse, if you keep your records wrongly or if you don’t qualify the amount needed for deductions, all that time-consuming process will be useless.
2. Restricted at some point
The Tax Cuts and Jobs Act limits or caps these types of deductions for both local and state taxes. A good example is the property tax, which is capped at $10,000.
Another thing, any interest charged on home equity loans secured for using in another purpose apart from renovation, becomes non-deductible. Also, you are allowed to include only interest on your first $750,000 of the total amount of your new mortgage.
Lastly, you can’t itemize all your medical and dental expenses, but only those that go beyond 10% of your adjusted gross income.
Who Itemizes Deductions?
A study done in 2014 shows that approximately 30% of taxpayers (44 million of 148.7 million) itemize their deductions, while the rest choose standardized deductions. The large percentage chose standard deductions because it’s more than the amount they can itemize. Also, they do it because it’s simple, or they’ve not realized they can save tax when they itemize.
Most of the high- and middle-income taxpayers are subjected to Alternative Minimum Tax (AMT), where it denies them some great benefits that itemized deductions offer.
Many taxpayers using AMT face the challenge of computing their tax liability twice. As a result, they end up in double taxation, exposing the taxpayer to pay a higher amount.
AMT limits you from listing deductions such as local and state taxes, which are allowed in itemized deductions. However, people in AMT are not limited to itemized deductions.
Should you go for Itemized Deductions?
Yes, you can, but only if you’re your deductible income is more than the standard deductions. Clairmont compares itemized deductions with a hurdle. Therefore, you must go beyond that hurdle for you to itemize.
Honestly, many people can’t reach that height unless they have property taxes or mortgage interests to deduct. And the cheaper way to go is the standard deductions since it’s designed majorly for people who don’t own their homes.
Again, unless some people have a major medical event or significant charitable gifts, they can find it rough to list enough deductions to itemize.
However, if you think you can’t fit in the itemized deductions, you should track your expenses regularly so that you may not miss a tax break. Additionally, if you can’t itemize annually, you can do that for some years if you can pool your charitable contributions.
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