One of the biggest choices you face when you file your income tax return is whether to claim the standard deduction or to itemize to minimize your IRS payment. The itemized deductions list includes home mortgage interest, state and local income taxes or sales taxes, real estate and property tax, gifts to charities, casualty and theft losses, medical and employee business expenses, and certain miscellaneous itemized deductions.
Some of these deductions, however, have limits. For example, your charitable contributions can’t exceed 50 percent of your adjusted gross income. And your medical expenses are deductible only to the extent they exceed 10 percent of your adjusted gross income — or 7.5 percent if you’re 65 or older.
Read on to learn everything you need about the best and worst ways to itemize deductions. Being prepared before you tackle your taxes is the perfect way to ensure a smooth, accurate process.
1. Best: Itemize When Itemized Deductions Exceed Your Standard Deduction
Itemize your deductions only if the total of your itemized deductions exceeds the value of your standard tax deduction. The standard deduction varies depending on your filing status. The standard deductions for 2017 are:
- Single: $6,350
- Head of Household: $9,350
- Married Filing Jointly or Qualifying Widow(er): $12,700
- Married Filing Separately: $6,350
If you’re married filing separately, you and your spouse must file the same way. One spouse cannot claim the standard deduction if the other itemizes.
2. Worst: Some Itemized Deductions Are Disallowed With Alternative Minimum Tax
If you’re stuck paying the alternative minimum tax — a tax designed to prevent people from claiming so many deductions they don’t pay taxes — you can’t claim most itemized deductions. For example, if you’re subject to the AMT, you’re not allowed to deduct taxes, miscellaneous deductions that are subject to the 2 percent threshold, or mortgage interest on a home equity loan or line of credit that you didn’t use to buy, build, or improve your main or second home.
3. Best: Keep Records to Justify All Itemized Deductions
You should keep records for all your deductions in case the Internal Revenue Service audits your return. Some deductions come with tax forms that report the amount you can deduct. For example, you get your mortgage interest reported to you on Form 1098. For other deductions, like medical expenses and charitable donations, you’ll need to get receipts.
4. Worst: Inflate Your Deductions
When you’re filing your taxes, you might be tempted to inflate your deductions or claim deductions for which you don’t actually qualify. The IRS, however, is on the lookout for taxpayers who inflate their deductions — the practice even appears on the IRS list of Dirty Dozen tax scams.
If you’re tempted to claim you made more charitable contributions or paid extra in medical expenses, don’t. Penalties for falsely claiming deductions can include your having to pay 20 percent of the amount disallowed and 75 percent of the amount owed and a $5,000 penalty for filing a frivolous tax return. In addition, you might face criminal charges.
5. Best: Lump Itemized Tax Write-Offs Into a Single Calendar Year
You can deduct only certain miscellaneous deductions that exceed 2 percent of your adjusted gross income, including tax return fees — whether you pay an accountant or file taxes online — and employee business expenses that are not reimbursed. If you know you’re going to take work-related education classes that you could pay for either in December or January — and you already have enough miscellaneous expenses to exceed the 2 percent threshold — pay for them in December and increase your deduction. Similarly, if you’re on the cusp of being able to itemize each year, consider lumping all of your charitable giving into one calendar year, itemizing taxes that year and claiming the standard deduction the following year.
6. Worst: Incurring Additional Expenses to Justify Itemizing
When you claim a tax deduction, you don’t get a dollar back for every dollar of the deduction amount. Instead, your savings equal your marginal tax rate times your deduction amount.
For example, if you fall in the 25 percent tax bracket, you save 25 cents on your taxes for every dollar of itemized deductions you claim. That’s great if have to spend the money anyway, but don’t incur an extra dollar of expenses just to save a quarter.