Should You Itemize Your Deductions
Is It to Your Advantage to Itemize Your Deductions?
Under the old tax rules from many years ago, the answer to this question was generally yes, for most filers. Today, and especially after TCJA, more filers are using the new standard deduction. If you want to itemize your deductions, you need to exceed those amounts for the standard deduction.
To itemize your deductions, you need to keep track of medical expenses, various types of taxes that you pay, charitable contributions, qualified mortgage interest paid, and certain casualty losses. It takes more work to keep accurate records for these deductions, but it could payoff in the long haul.
Using the standard deduction or itemizing your deductions, accomplishes one thing – it reduces your taxable income and ultimately, the amount of federal and state income taxes that you will have to pay. You have the option to choose the method that benefits you most.
However, you are not permitted to use both methods in the same tax year. You can change from year to year, and need to see which method works the best in your situation. That may involve doing a calculation on your state tax return too. Some states will permit itemizing only if you itemize on the federal return.
What does it mean to itemize your deductions?
It’s exactly as it sounds…listing the various expenses that you have receipts for instead of just showing the one number for a standard deduction. They all get listed on the Schedule A of the Form 1040, in their respective categories. The IRS does require that you keep receipts for all deductions that you claim.
Some of these receipts are medical bills and medical insurance bills, bank statements, check stubs, real estate tax bills, and especially charitable contributions. Cancelled checks, acknowledgement letters and statements from churches and various charities.
Standard deduction versus itemizing deductions
Tax simplification is another reason for the increased standard deduction. There are certain areas on the Schedule A where some taxpayers tend to embellish somewhat. When the standard deduction is claimed, that cannot be done.
This past year, 2020, $12,200 was the new standard deduction for a single taxpayer, and included the married filing separate category. The amount increased to $24,400 for married taxpayers who were filing a joint return. It also included those who filed as a qualifying widower or widow who had a dependent child. The head of household status was $18,350.
Back in 2017, under the old tax law, the standard deduction was much less. When the TCJA went into effect, all of the standard deduction categories were increase substantially. But there is no longer a deduction for personal exemptions.
If a taxpayer who isn’t buying a home and has no deduction for mortgage interest, it is usually better for them to use the standard deduction.
Times when a taxpayer has to itemize deductions
There are certain situations that exist when it will require you to itemize your deductions. For instance, when a married couple files separate returns, the first one to file determines the method that both spouses must use.
If the one spouse who files their return first, files by using the itemized deduction route, then the other spouse must also itemize, even if he doesn’t have the deductions to do so. This will result in a much larger tax bill for that individual.
If a non-resident alien files a U.S. tax return, he too must file using the itemized deductions method. This individual is not permitted to use the new standard deduction method.
On Schedule A, the first category is medical expenses. These include medical insurance that you pay with after-tax dollars, dental, prescriptions, certain nursing home costs, transportation for medical care, and a few more per the IRS listing. You can only deduct these expenses that exceed 10% of your AGI for the tax year 2020.
The next section is the taxes category. It includes state and local taxes paid. Also, real estate taxes, personal property taxes, foreign taxes on investments. The TCJA imposed a cap of $10,000 maximum for this section that can be deducted.
The next section is the deduction for interest paid. It includes qualified home mortgage interest, mortgage insurance premiums, certain points paid, and qualified investment interest.
This next section, gifts to charity, has been changed by the TCJA too, mostly on the increase to 60% of your AGI as a deduction. It includes gifts by cash or check and in-kind contributions. This area has been targeted for reviews over the past few years for obvious reasons.
The next section, casualty and theft losses, can only be claimed if it’s a result of loss in a federally declared disaster area by the president. Further limitations apply.
The next section for line 16, other itemized deductions, consists of several types of expenses listed by the IRS. The most popular one is probably gambling losses. These can be deducted, but only to the extent of gambling winnings listed as income on your tax return.
The miscellaneous deductions section that was found in earlier years has been eliminated by the TCJA.
The total of your itemized deductions used to be limited for high income individuals based on provisions of the Pease Act. When the TCJA took effect in 2017, this phase out was eliminated through 2025. It may or may not be extended. So, if you decide to itemize your deductions, you get a break…for now.
An accountant and tax preparer by profession, Gust’s true passion lies in his company blog titled “HBS Financial Group, Ltd.”. Through this venue, he not only tries to teach individuals about budgeting, money management, and taxation but he writes the majority of the articles as well.