Did You Know???
Itemized Deductions are NOT Just For Homeowners with Mortgages.
The biggest question individuals have when preparing their tax returns is whether to take the Standard Deduction or claim the mysterious Itemized Deductions on the IRS form Schedule A.
Here’s the info that can help you decide what will save you the most tax dollars.
For the 2016 tax returns, these are the “Standard Deductions taken from the IRS Publication 501, page 24. See details below:
Table 6. Standard Deduction Chart for Most People – use the higher of this or Itemized Deductions
If your filing status is… Your standard deduction is…
Single or Married filing separately $6,300
Married filing jointly or Qualified widow(er) $12,600
Head of Household $9,300
Of course is you’re over 65, blind, or a dependent child, read further onto page 25. However these numbers are the most widely applicable.
The Standard Deduction is the amount that you are automatically permitted to subtract from your income before you calculate your taxes for the year. Over the years it has increased quite a bit.
About the Itemized Deductions
For many taxpayers, the now expensive health insurance costs could actually give you more in your itemized deductions than the standard. Use this step by step formula to discover tax savings you may have overlooked. Hold onto your hard earned money.
DON’T start at the top of the form. Instead follow the outline below.
Step 1. Taxes You Paid
- State and local taxes are taken from your W-2’s, so if you are employed you get a deduction for the state income taxes, unemployment and disability taxes.
- If you’re NOT employed, all is not lost in this section. There is a relatively new deduction just for you labeled General Sales Taxes. Your deduction is taken as a percentage based on your state of residence. Many people don’t consider this, and lose out.
- If you are a homeowner, your property taxes are next, and this can be enough to get you close or even over the Standard Deduction. While many states have low property taxes, certain areas, especially in the North East, these taxes can be in the $8,000 to $12,000 range or more. Remember to add the property taxes paid on a vacation home or second home here as well.
- Certain states have Personal Property Taxes. Connecticut comes to mind, with their PPT on personal automobiles. Be sure to include this if it applies.
Step 2. Home Mortgage Interest
- This is “black and white”. If you have it, you have it. Generally this one figure will put you over the top unless your mortgage is very low.
- People frequently ask me if they should mortgage their home to be able to take the tax deduction. My answer surprises many – but think about this:
Just for an example, assume you are in a 20% tax bracket. Why give the bank $100 so you can save $20 in taxes. In other words, you are throwing $80 for each hundred into the wind. Only mortgage your home if you need to.
Even if you don’t exceed the standard deduction yet, keep going!
Step 3. Charitable Gifts
- Do you give money to your church or synagogue (or other religious affiliation)? This is deductible, even if it’s cash. Keep track of it. If you give a weekly fixed amount or annual donation, these are fully deductible. The only wrinkle is if donations to one organization exceed $250. In that case you need a receipt that you will keep for your own records. Too many people don’t claim cash for fear of audit. Don’t worry about it – claim what you truly donated.
- Non-cash donations are very common and the deduction is too often overlooked. When you donate clothing and household goods to organizations like Salvation Army or Disabled Vets, you are entitled to a deduction. IRS has a valuation chart so you can put a value on each item. I recommend you keep a list, and take pictures of the items you plan to donate. Just lay everything out on the floor and click, click. Then print and keep with your receipts.
See the Salvation Army Valuation Guide for details:
Step 4. Medical and Dental Expenses
If you have come close to your Standard Deduction allowance, taking the time to review these expenses becomes very worthwhile, especially with the high costs of health insurance and medical treatment. Below is a comprehensive list of all the deductible medical expenses you should total for the year. It includes everything you paid in 2016 by cash and credit cards, even if the credit card bill is paid in the 2017.
- Health Insurance Premiums – for yourself and any dependents. (Does not include adult children up to the age of 26 after they are no longer dependents.)
- Physician Payments – all co-pays and balances.
- Prescription Payments – all co-pays and balances.
- Eye glasses and contact lenses.
- Hearing Aids.
- Medical Mileage – all trips to and from appointments for all of the above. The current allowance is 19 cents per mile.
- Long Term Care Insurance – deductions are based on your age and are subject to a complex calculation. If you paid it, be sure it’s in with your documents.
The only wrinkle with the medical tax deduction is that you must subtract 10% of your adjusted income from the total. The balance after that subtraction is deductible.
Step 5. Miscellaneous Expenses
If you’re still working with that calculator, and you’ve gotten over the Standard Deduction hurdle, some of these expenses may work out for you.
:Line 29 is for Unreimbursed Employee Business Expenses. This can actually become a chapter in a book if you have a lot of deductions here. Most don’t.
The common expenses most list here are things like uniforms, safety equipment (goggles, steel tipped boots) and the like. Also in that section include last year’s tax preparation fees (or tax program cost) and safety deposit box fees.
Before any of these expenses can be added to your total, you must subtract 2% of your adjusted income. In many cases the expenses are less than the 2% but it’s always worth a try.
If you have more, check out the instructions for the IRS Form 2106
Wrapping It Up
Before you start to review your potential deductions, print out the IRS form Schedule A, so you can make notes and use for additional reference.
Tax returns can be intimidating. If you don’t have your own business or investments similar to Warren Buffet, there is no need to fear the IRS or an audit. If you are somewhat comfortable with numbers, you can do this yourself with a commercial tax program and save yourself the accountant fees. A number of my clients have recently asked me to coach them through it and we have done so very successfully.
If that’s not for you, be certain that your tax preparer has all the info outlined here and be sure to ask about whether these items are included.
The more you know, the more you save.
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