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To Itemize or Not to Itemize? That Is the Question
Misconceptions are common when it comes to taxes in general, but some aspects of income tax preparation seem to have more than their fair share.
A breeding ground for misconceptions is the discrepancies over rules: The actual IRS rules versus the rules according to your best friend. The rules that you hear on the street include timeless classics like “Only the wealthy itemize” or “Itemizing is the only way to get your full refund,” both of which are untrue. There are plenty of deductions that you can take without itemizing, including:
- IRA contributions: Up to $5,000 if you are under age 50 and $6,000 if you are over 50.
- Student loan interest: Up to $2,500 if your adjusted gross income is less than $80,000 for singles and $160,000 for married couples filing jointly.
- Alimony: You can deduct court-ordered payments to your separated/divorced spouse. This does not include child support.
- Penalty on early savings withdrawals
- Employee moving expenses: If you moved at least 50 miles because of a change in your job location.
- Health Savings Account contributions
- Self-employed health insurance: If you are self-employed, you can deduct health insurance premiums (income limits apply).
- Retirement plan contributions: If you are self-employed, contributions to plans such as SEP-IRAs, Keogh plans, and solo 401(k) plans may be deductible.
- Half of your self-employment taxes: 50% of your Social Security and Medicare contributions.
The Standard Deduction
There is a good reason most taxpayers don’t itemize, and it is called the standard deduction. This is a flat amount the IRS allows you to deduct from your income regardless of what your actual deductible expenses are.
It’s important to know what the current standard deduction is before deciding if you should itemize because it changes every year. For the tax year 2014 (the return you file in 2015) the amounts are: $6,200 for singles. $12,400 for married couples filing jointly and $9,100 for heads of household.
You should itemize your deductions if the amount of your deductible expenses is greater than your standard deduction. The advantage of itemizing is that you will be able to reduce your taxable income by more than your standard deduction.
A common reason people choose not to itemize is that it requires additional work because you must list all of your deductible expenses on Schedule A. If in any tax year you think itemizing your return will be necessary, you should save your canceled checks, receipts, and statements so that you can tally them at the end of the year and have a paper trail in the event the IRS questions your deductions.
Itemized deductions include:
Medical and dental expenses: You can deduct these expenses if they exceed 10% of your adjusted gross income if you are under 65, and 7.5% of your AGI if you or your spouse are over 65. Medical and dental expenses include the insurance premiums you pay.
Deductible taxes: There are four types of non-business taxes you pay that are deductible:
- State, local, and foreign income taxes.
- State, local, and foreign real estate taxes.
- State, local, and foreign property taxes.
- State, local, and foreign sales tax.
Home mortgage points: Any discount points that you paid in 2014 on a home loan or refinance of your mortgage. (Origination points are not deductible.)
Interest expense: Interest that you paid on certain types of loans is deductible, including mortgage interest. Nondeductible interest includes autos for personal use and credit card interest.
Charitable contributions: This does not include direct payments to individuals.
Business use of home: Whether you are self-employed or an employee, if you use a portion of your home for work, a portion of your household expenses is deductible. But exercise caution with this deduction, as its frequent abuse raises a red flag to the IRS.
Business use of car: If you use your car for your job or business, you may be able to deduct either actual expenses or the standard mileage deduction of 56 cents per mile. Commuting is not considered business use.
Business travel expense: Generally, if you have to spend the night away from home for work or business, a portion of your expenses may be deductible.
Business entertainment expense: Entertainment expenses that are both ordinary and necessary to your business or trade may be deductible. There are very strict rules as to what is allowed.
Educational expenses: This includes expenses such as continuing professional education or education that maintains or improves your job skills.
Employee business expenses: This includes things like tools or uniforms that are required for your job that are not paid for by your employer. It does not include clothing items that can be worn outside of work, such as suits.
Losses to casualty or theft: Expenses that are the result of theft or damage from an accident that are not covered by insurance may be deductible.
You’re on Your Own
The decision about whether or not to itemize is up to you. The IRS will not tell you when you should or should not itemize. In most cases a professional tax preparer such as a CPA can review your expenses and make a recommendation.
However, when using a tax professional you should consider the added cost of itemizing since most will charge an additional fee to prepare a Schedule A. Since itemizing is never required, you should consider whether or not the savings on your tax bill are greater than the additional cost of itemizing.