Today let’s talk about 5 itemized tax deductions that can you big money this tax season. But before we get into that we can quickly go over the difference between itemized versus standard deductions.
Schedule A is the way you itemize your deductions. It’s basically a list of all your itemized deductions for the year. But you only use this form if you are itemizing. You can either itemize or take the standard deduction. The standard deduction is really just that, the standard deduction that the IRS allows you to take each year. The amount depends on your tax status (Single, Married Filing Jointly, Head of Household, etc.) and whether or not you are claimed as a dependent by someone else. You can also get an additional standard deduction if you are blind and/or over the age of 65. You don’t have to track or prove anything. You can take this deduction every year no matter what. Itemized deductions are things like medical costs, long-term care, property taxes, mortgage interest, personal property tax and many others. If you’ve tracked this information throughout the year you can choose whether or not you want to take the standard deduction or the itemized. Basically choose the larger amount as it will give you the biggest tax benefit. You can work it out both ways to see which is best for you. (We do this for you if PJF is preparing your taxes.)
One thing to keep in mind is if you itemize, the alternative minimum tax could kick in if your income is too high. What that means is your deductions are added back to an alternative tax calculation to determine if you need to pay a minimum amount of tax. Basically, you calculate tax two different ways. It’s the IRS’ way of making you pay a minimum amount of tax even if you have a lot of itemized deductions.
So if you are itemizing this year here are the 5 itemized tax deductions to look for to help lower your taxable income.
- Sales Tax or Income Tax – If you live in a state like Minnesota with income tax you can deduct all of the income that you pay over the year. If you are using a tax software it will usually take this deduction for you. The thing to look for is if your income is low this year (or there is no state sales income tax) you should deduct your sales tax instead. For example, if you purchased a car you might have paid a large chunk of sales tax on that purchase. As long as you have documentation to prove it you can deduct this along with all of the other sales taxes you’ve paid over the year. Consider calculating both income and sales tax to make sure you are taking the largest deduction possible.
- Property Taxes – This is all of the taxes that you pay related to your personal or real property. The biggest one could be your primary residence but could also include your vacation property (assuming you don’t rent it out – if you do then the taxes would go on schedule E). This deduction also includes auto and boat registration taxes. Basically any state or local taxes that you paid throughout the year charged on personal property, based on the value of the property and charged on an annual basis
- Mortgage Interest Deduction – This is the mortgage interest paid on your primary interest and vacation/second home. However, you only get to deduct the interest on up to $1,000,000 of mortgage debt. I know this seems like but I’ve seen cases where a primary residence and cabin debt get over the $1,000,000 mark pretty quickly. We love our cabins in Minnesota!
- Charitable Contributions – This is any donation to non-profits like cash or non-cash items like clothing and household goods. Keep in mind if the value is over $500 you have fill out the additional 283 Form. And if the value is over $5,000 you have to get the item appraised. Do not appraise it yourself the IRS won’t count this.
- Miscellaneous Deductions – Some examples of these things could be safe deposit boxes, estate planning fees, tax preparation fees, unreimbursed employee expenses, investment management fees, casualty losses, and gambling losses (only to the extent you have gambling gains. Keep in mind most of these deductions are subject to 2% of you AGI meaning the combined amount of these expenses have to be over 2% of your adjusted gross income in order to be deductible at all.
There you go, the five deductions you need to take this year if you’re itemizing. The 6th item that I left off the list is Medical deductions. I left if off because it is harder to meet the threshold. If you are older than age 65 it is subject to 7.5% of your AGI and for everyone else is 10% of your AGI. If you’ve itemized in previous years you should consider taking a look to make sure you took every deduction on this list. If not you can amend a tax return within three years of the date you filed or within two years form the date you paid the tax, whichever is later.