One of the biggest choices you face when you file your income tax return is whether to claim the standard deduction or to itemize in order to minimize your IRS payment. Some examples of itemized deductions are home mortgage interest, state and local income taxes or sales taxes, real estate and property taxes, gifts to charities, casualty and theft losses due to a federally declared disaster and medical expenses.
Some of these deductions, however, have limits. For example, your charitable contributions can’t exceed 60% of your adjusted gross income. And your medical expenses are deductible only to the extent that they exceed 7.5% of your adjusted gross income.
It’s important to know what to itemize and the worst and best 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 the Standard Deduction
If you’re wondering, “Should I itemize?” the answer is yes but only if the total of your itemized deductions exceeds the value of your standard tax deduction. The standard deductions for each filing status are:
- Single: $12,400
- Head of Household: $18,650
- Married Filing Jointly or Qualifying Widow(er): $24,800
- Married Filing Separately: $12,400
If you’re married and 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 that they don’t pay taxes — you can’t claim many itemized deductions. For example, if you’re subject to the AMT, you’re not allowed to deduct taxes or mortgage interest on a home equity loan or line of credit that you didn’t use to buy, build or improve your home.
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3. Best: Keep Records To Justify All Itemized Deductions
You should keep records for all your deductions in case the IRS 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: Inflating 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 its 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 could potentially include having to pay 20% of the disallowed amount, 75% of the amount owed and a $5,000 penalty for filing a frivolous tax return. In addition, you might face criminal charges.
5. 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 multiplied by your deduction amount.
For example, if you fall in the 24% tax bracket, you save 24 cents on your taxes for every dollar of any of the best itemized deductions you claim. That’s great if you have to spend the money anyway, but don’t incur an extra dollar of expenses just to save less than a quarter.
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Gabrielle Olya contributed to the reporting for this article.