Posted in Taxes
Every year when you file your personal or business taxes. you are eligible for deductions. Most people are eligible for the standard deduction which is applied to your adjusted gross income, lowering your total taxable income.
In certain cases, especially if you are self-employed or an entrepreneur, a standard deduction may not get you your maximum return. Instead of claiming the standard deduction, it might be best to itemize your deductions. Itemizing your deductions is the act of actually listing out all of your eligible expenses. While it takes more work and requires that you keep your receipts throughout the year, in the end, it might allow you to obtain a bigger tax refund.
It's critically important to remember that you cannot itemize your deductions while claiming the standard deduction. You must do one or the other.
Who Should Itemize Their Deductions?
Instructions regarding itemized deductions are available on the IRS website under Form 1040 Schedule A. You should use itemized deductions if you meet any of these qualifications:
- You cannot use the standard deduction
- You had large uninsured medical or dental expenses
- You paid interest or taxes on your home
- You had large unreimbursed employee business expenses
- You had large uninsured casualty or theft losses
- You made large charitable contributions
Details on who can and cannot use the standard deduction can be found here .
What Qualifies as an Itemized Deduction?
The items you can itemize are fairly specific and you must have receipts and documentation to back up your claims. Let’s examine the five major categories.
1. Uninsured Medical or Dental Expenses
If you or a dependent have spent money on medical or dental procedures in the past year, and those expenses were uninsured, meaning you paid for them out of pocket. they can be entered on your return as an itemized deduction. The expenses, however, need to add up to approximately 7.5% of your adjusted gross income in order to count toward your deduction.
2. Home Interest or Taxes
If you own your home or pay a mortgage, your lender should send you Form 1098 every year. This form outlines the deductible
interest and points (charges associated with getting a home mortgage) that you’ve paid over the past year. If you’ve refinanced or bought your home in the past year, you may also be able to deduct certain points that you’ve paid.
You can also deduct personal property taxes, including real estate taxes, and state and local taxes for the past year. However, if you also itemized your deductions last year, you must count any state tax refund as income.
3. Charitable Donations
If you have made significant charitable donations in the last year, those can also be deducted. If your donations exceed 50% of your adjusted gross income, you must carry it over to the next tax year. The same is true of any non-cash contributions that exceed 30% of your adjusted gross income.
4. Casualty and Theft Losses
Similar to medical and dental expenses, only losses within excess of 10% of your adjusted gross income are actually deductible. These losses can also be reported on Schedule A.
5. Job-Related Expenses
If you have incurred job-related expenses that were not reimbursed by your employer, these are acceptable deductions. It doesn’t matter if you are self-employed or work for someone else; any work-related expenses, including supplies, protective gear, uniforms, vehicle expenses or professional dues or subscriptions can be itemized. You can also deduct the expenses for a home office if you use part of your home exclusively as a home office. For more details about this type of deduction check out this article here .
Don’t forget that you can also deduct your tax preparation fees, including any fees associated with tax prep software or costs to file. This is especially important for self-employed individuals who might prefer to use a professional tax preparer to maximize their deductions.
If you have questions regarding itemized deductions, it’s best to ask a tax accountant or other tax professional. The IRS website is a great resource, but the language on the site can sometimes be a little hard to wade through. The most important part of taking itemized deductions is that you keep your receipts. Doing so ensures that your deductions are as accurate as possible, and can protect you in the event of an audit.