The most common aspect of filing a personal tax return which causes confusion is whether to itemize your deductions or claim the standard deduction. While many people will simply claim the standard deduction to avoid the headache of calculating the itemized deduction, there are actually cases where itemizing can save a lot of money on tax liability.
The standard deduction for a single person or for individuals that are married filing separately is $5,000. Head of household is $7,300 and married filing jointly and qualifying widow are $10,000. Basically, you should itemize your deductions when you can claim more than these amounts by doing so. If you are married filing jointly and you can claim $14,000 by itemizing your deductions, it would be throwing money away to use the standard deduction. However, the complication often arises from the intimidation of calculating the itemized deduction.
To itemize your deductions, you complete Schedule A of the form 1040 when you file your personal taxes. Deductions available on Schedule A are qualified medical and dental expenses, certain taxes which you have paid, certain interest you have paid, qualified gifts to charity, certain unreimbursed employment expenses, tax preparation fees, and other miscellaneous deductions. It may be a daunting task to evaluate all of these possible deductions, but it will very well be worth your time to do so.
One common incentive to itemize deductions instead of utilizing the standard deduction is the purchase of a house. Often, people who are not buying a home will not amass enough in the way of deductible expenses to justify itemization. However, once a person purchases a home, there is a plethora of deductions available. For example, interest paid on a mortgage is typically deductible. Because payments in the early years of a mortgage are primarily interest, this is a benefit to home buyers. Real estate or property taxes are also usually deductible. These incentives are common selling points to purchasing a home and should be considered in deciding whether or not to itemize.
Another deciding factor may be excessive medical expenses. You may deduct qualified medical and dental expenses that exceed 7.5% of your adjusted gross income (AGI). While many people may not incur enough medical expenses to validate itemizing their return, if you or someone on your household has extensive medical issues, this may be a reason to consider itemizing your deductions. This may allow you to make the most of the medical and dental expenses you have incurred to save tax dollars.
Charitable contributions may be another reason to itemize your deductions. Gifts to qualified charitable organizations are deductible on Schedule A. Depending on how much you have given to charity, this may give cause to forego the standard deduction to utilize itemization.
For the most part, itemization will prove to be most beneficial when you have multiple areas of deductions available. However, each of these areas will provide a starting point in evaluating how you should file.