As tax season approaches, it’s important to understand how itemized deductions work and what expenses can be deducted. Itemized deductions are a way for taxpayers to reduce their taxable income by subtracting qualified expenses from their gross income.
The first step in determining whether it makes sense to itemize is to compare the total of your available itemized deductions against the standard deduction. The standard deduction is a set amount that reduces your taxable income without requiring you to list every expense.
The Tax Cuts and Jobs Act (TCJA) passed in 2017 almost doubled the standard deduction amounts: $12,400 for single filers, $18,650 for heads of households, and $24,800 for married couples filing jointly. If your total itemized deductions don’t exceed these amounts – plus any additional limits based on age or disability status – taking the standard deduction will likely result in lower taxes.
Qualified expenses that can be included as itemized deductions include:
1. Medical Expenses: Medical expenses such as doctor visits and prescriptions may qualify if they exceed 7.5% of your adjusted gross income (AGI).
2. State and Local Taxes: You can deduct up to $10,000 of state and local taxes paid during the year including property tax.
3. Mortgage Interest: Deductible interest includes mortgage interest payments on loans used to buy or improve your primary residence or second home.
4. Charitable Contributions: Cash donations made directly to qualified charitable organizations are deductible up to 60 percent of AGI while non-cash donations are usually limited depending on its fair market value
5. Job-Related Expenses – Unreimbursed job-related expenses like travel costs associated with business trips or necessary equipment required by an employer can also qualify as a write-off but only if they exceed 2% of AGI
It’s important to note that not all personal expenses count toward reducing your taxable liability so make sure to consult with a qualified tax professional or use reputable tax software to ensure only qualified expenses are deducted.
In conclusion, itemized deductions can be a great way to lower your taxable income and reduce the amount of taxes you owe. But before deciding to itemize, it’s important to compare your total itemized deductions against the standard deduction and make sure that all expenses claimed meet IRS guidelines.