As a taxpayer, you have the option of taking a standard tax deduction or itemizing your deductions to lower your taxes. It’s important to understand the difference between the two and make sure you choose the right one for your situation.
In 2016, the standard deduction was $6,300 for singles and married couples filing separately, $12,600 for married couples filing jointly and $9,300 head of household filers. If you can’t justify itemized deductions that exceed those amounts, it likely makes sense for you to take the standard deduction.
If you plan on itemizing your deductions, there are right and wrong ways to do it. Use these tax tips to avoid making a filing mistake.
3 Best Ways to Itemize Your Taxes
If you’ve decided to itemize, make sure you do it right. Follow these three rules and you’ll likely experience smooth sailing when you file.
1. Use the Right Form
You can file your taxes using Form 1040EZ, Form 1040A or Form 1040 but only Form 1040 allows you to claim all your deductions if you itemize. Form 1040 is customizable and you can easily maximize your tax breaks by using it, whether you’re deducting an interest expense, the business use of your home or anything else that qualifies.
2. Understand What You Can Deduct
Make a list of your IRS-approved deductible expenses to see if it makes more sense to itemize or stick to the standard deduction. Remember, deductible expenses include things like mortgage interest, property taxes and charitable donations. And you can even deduct qualified medical expenses.
The full list of approved deductions appears in the IRS’s Publication 17. Use the itemized deductions worksheet to accurately outline all your expenses and maximize your deductions.
3. Use a Tax Preparation Software Program
If you’re still not sure whether you should take a standard deduction or itemize, using a tax preparation software program might help you decide. To use one of these programs, you enter your estimated expenses and the program categorizes them and reviews your tax filing status to provide you with your total deductible amounts. Doing this might also make it easier to pull together your itemized deductions worksheet when you’re ready to file.
3 Worst Ways to Itemize Your Taxes
If you itemize incorrectly, you could create a host of problems for yourself. Save yourself a headache and follow these tips regarding what not to do when you itemize your taxes.
1. Falsifying Deductions
Misrepresenting anything on your tax return can result in a fine or even a prison sentence. A few words of advice: Don’t lie to the IRS.
Self-employed taxpayers who deliberately categorize unqualified expenses as business expenses, people who deduct more than they should for charitable contributions and those who claim a dependent they don’t have are good examples of things the IRS might consider tax fraud. Make sure you can back up each and every deduction with a receipt in case of an audit.
2. Deducting Employer-Reimbursed Items
If your employer reimbursed you for moving or travel and entertainment expenses — or other costs related to your employment — you can claim them as an itemized deduction only if he reimbursed you in the form of wages. Check your W-2 to see if there is a code P amount in box 12; if there is it means that amount is included in your taxable income. If the expenses are not wage reimbursements you can’t take an employee business expense deduction or include the amount in your gross income calculation.
3. Ignoring Miscellaneous Deduction Limits
The IRS allows you can claim miscellaneous itemized deductions; however, they can account for only 2 percent of your adjusted gross income. Legal fees related to doing your job, the cost of tools you need to perform your job, work clothes and uniforms and even depreciation on your home computer are all qualified miscellaneous deductions.
You can’t deduct certain miscellaneous expenses, however, such as the cost of home repairs, life insurance premiums or commuting to work. Make sure you review the complete list of deductible expenses in the IRS’s Publication 529.