When life becomes more complicated, so do your taxes.
As you claim dependents, purchase a home, or are involved in a major loss or theft you can claim specific items on your taxes that will reduce your tax burden.
Other reasons such as owning your own small business, earning money in more than one state, or if you have investments or property that can be claimed as a loss then your taxes become slightly more difficult to file.
Most single people will file a Form 1040-EZ, but if you have any type of deduction that is greater than the standard deduction it may be best to file using a Form 1040.
So when should you itemize on your taxes? The following will provide some major reasons for itemizing.
According to the IRS, “Some taxpayers must itemize deductions because they cannot use the standard deduction,” (IRS, 2011).
A major reason would be if you are married by filing a separate return and your spouse itemizes then you must also itemize your deductions. Another reason is if you are a nonresident alien or a dual-status alien during the year. Finally, if you are filing for a period of less than 12 months because of a change in your annual accounting method the IRS mandates that you itemize your deductions.
If you are not mandated by the IRS to itemize then you will need to decide if the standard deduction is better or if the deduction you can claim from itemizing is better.
When to Itemize
You should plan to itemize if your total deductions are more than the standard deduction allocated by the IRS.
Many items can be deducted and the following will review the more common deductions. Common items will drive your deductions up to include:
Main Home Mortgage Payments
Mortgage interest can reach thousands of dollars if not tens of thousands making this a sure fire reason to itemize your deductions.
Mortgage interest is usually higher than the standard deduction in most cases. If you are paying on a mortgage on your main home it would be a good idea to itemize.
You can also claim the “points” you pay when obtaining a home mortgage. Essentially the “points” are interest you are paying upfront and are tax deductible under home mortgage interest for your main home.
Uninsured Medical and Dental Expenses
Not all medical and dental expenses can be itemized and according to the IRS this can only be itemized if it reaches 7.5% of your adjusted gross income.
Typically you pay for your medical and dental insurance prior to paying taxes on your income and this portion is not used when reporting your annual gross income on your W-2. Limitations exist for this deduction. First, the amount paid must be over 7.5% of your income. You can typically claim anything dealing with medical expenses including fees, certain legal fees pertaining to medical issues, meals and lodging charged by hospitals, treatments, and even transportation cost for medical treatments.
You cannot, however, claim expenses such as over-the-counter medications, diet food items, or the cost of health club dues, funeral or burial expenses, toothpaste, toiletries, cosmetics, a trip or program for the general improvement of your health, or the cost of cosmetic surgery.
Consult a professional tax preparer if you are confused about what you can and cannot claim under medical and dental expenses.
State and Local Taxes
If you paid state and/or local taxes then you can deduct these using the Schedule A for the Form 1040.
The taxes must have been paid in the tax year you are filing your taxes for even if you are paying for taxes from previous years. Some states allow you to claim taxes imposed on you for a vehicle, boat, or real estate taxes. Using a program such as TurboTax can quickly determine if the taxes you paid are deductible. A professional tax preparer will also be able to help decide what can be deducted.
You cannot deduct Federal income taxes, social security taxes, or homeowner’s association fees among other items. Check the Form 1040 instructions for more information on this topic.
Throughout the year many people contribute to tax-deductible organizations. These are often non-profit or not-for-profit organizations accepting monetary donations or items. According to the IRS the taxpayer is responsible for maintaining a list of all items donated to the charitable organization. The organization should provide you with a receipt to keep with your list.
Using It’s Deductible by TurboTax throughout the year can make this process painless during tax preparations. This program helps to determine fair market value for your donated property. IRS Publication 561 can be used to understand what fair market value is and how to determine it for your property.
If you give money in the form of cash, check, or other monetary gift (regardless of amount), the taxpayer is required to keep a record of the contribution to include written communication from the qualified organization. The communication should contain the name of the organization, what you donated, the date of the donation, and the amount of the contribution. More information can be obtained from IRS Form 8283.
Itemizing your deductions is often a personal choice, but it can help to save you money.
Other reasons to itemize include business expenses, first-time homeowners, casualties, disasters, thefts, tax benefits for education, employee business expenses, and unreimbursed employee business expenses. Using an online tax preparation program will help determine which deduction is greater or a professional tax preparer can help you make the decision.
Great post about itemizing. Other expenses that you can include on your schedule A are gambling losses, casualty and theft losses, miscellaneous expenses such as unreimbursed employee expenses etc.
Great article. Thanks! My husband and I run a small construction business and we’ve found keeping up with business tax and personal tax and itemising everything – not to mention keeping up with itemizing all of the receipts – really difficult. And I know we’ve lost out on a lot of claims over the years.
We actually came across a pretty neat iPhone app (tax receipt log) that really helps with it though. It’s an on the go way of tracking your GST, expenses and budget. My husband just takes a photo of the receipt as he gets it at the counter, enters the total and then at the end of the month he emails a complete itemised file to himself. The file keeps a photo of all of the receipts, so if you lose the physical copy, you’ve got an e-copy.
Don’t mean to ramble, but I wanted to share what has made the current financial year much easier for us!
We haven’t had the mortgage interest payment deduction for several years, since we paid off our mortgage. When our property tax is thrown into the deduction pool, we typically have enough other deductions that it is worthwhile to itemize. With current tax software tools, it isn’t that big of a deal to itemize. We have a folder in our file cabinet that is labeled “deductible.” All charitable receipts, tax payments, and medical payments go in there. It simplifies figuring out our itemized income taxes.
These are all great tips, especially the uninsured medical and dental expenses. My husband just talks to one of his bosses about this one because he was a bit confused.