What Are Itemized Deductions?

1 - What Are Itemized Deductions_ Header ImageYou’ve probably heard the term, but that doesn’t make itemized deductions any less confusing. What are they, and how can you use them?

Read on to learn the basics and find out whether itemized deductions are right for you.

What are they?

Itemized deductions are expenses that you can claim back on your federal tax return. They effectively reduce your taxable income, which in turn lowers your tax bill. This makes itemized deductions a great way to aid in tax planning – but they don’t always make sense.

That’s because the federal tax code allows for a standardized lump-sum deduction, which can lob several thousand dollars off of your taxable income.

Specifically, for the 2016 tax year:

If your filing status is… Your standard deduction is…
Single $6,300
Married filing jointly $12,600
Married filing separately $6,300
Head of household $9,300
Qualifying widow(er) $12,600

Elderly or blind filers can take an additional standard deduction of $1,250; conversely, if you can be claimed as a dependent on someone else’s return your deduction will fall.

Which do I choose?

If you take the standard deduction, you’re not permitted to itemize your deductible expenses – and if you itemize deductions, you won’t be able to take the standard deduction.

In other words: choose the one that allows the highest deduction.

The best way to do this is to figure out if your deductible expenses exceed the amount that you’d be able to take as a standard deduction.

Adding up your deductible expenses

While your individual deductible expenses will vary, there are a few common categories that many taxpayers utilize. We’ll cover them here – just keep in mind that you might want to speak to a professional advisor or accountant to determine which deductible expenses are most appropriate for your situation.

Home mortgage interest and related expenses

Did you know that you can deduct more than interest payments on your home mortgage? There are other qualifying expenses that could significantly boost the value of this deduction.

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Charitable contributions

If you make contributions to charity, don’t forget to keep those receipts! Your charitable contributions are fully deductible, but you’ll need to maintain records for any gift over $250 in value.

Please note that this includes gifts of property! So, for example, if you have equity securities that have increased significantly in value, consider using them in lieu of cash for your charitable contributions. You’ll have the benefit of a full deduction against the value of the assets and you’ll avoid paying capital gains taxes on a sale.

Medical and dental expenses

If you have medical costs for doctor’s appointments, treatments, dental appointments and prescriptions that weren’t reimbursed by insurance or other sources, you may be able to claim them on your taxes. They don’t have to be for you as an individual: expenses for your spouse or dependents also qualify.

As above, it pays to keep a record. Typically, your expenses will have to be above 10% of your adjusted gross income to qualify for deduction.

State and local taxes

Taxes paid to the state or your city are deductible against your federal return. Just keep in mind that you have an important choice to make: you can either deduct your state and local sales tax, or your state and local income tax.

For sales tax, you’ll either need to keep all of your receipts (a tall order for even the most organized taxpayer) or consult the “optional sales tax tables” that the IRS publishes.

For income taxes paid, look at your W-2 or estimated tax payments for this information.

While one might seem easier than the other, it often makes sense to compare the two options to see which is more advantageous before making a choice.

Tax preparation costs

If you hire someone to prepare your taxes (or purchased software to do so), good news: you can claim the expense as an itemized deduction. This includes any e-filing fees.

This benefit is subject to a hurdle, however: you can only deduct any amount that exceeds 2% of your adjusted gross income.

Business expenses

Whether you have a home-based business or work for someone else, if you have unreimbursed expenses you may be able to include them in your itemized deductions. This could include business property, such as a computer or cell phone, or travel costs if you drive a lot or bought your own plane tickets.

Be sure to keep records of your business expenses and utilize the guidance at IRS.gov to ensure that you deduct your expenses appropriately. This is especially important if you have your own business or if you want to deduct travel costs, as these are tricky areas to navigate.

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Get ready: Get organized

To make the best decision for your situation, you’ll need two critical tools:

  • Very good records of the expenses that are eligible for itemized deductions
  • A calculator

While you may be reading this with an eye towards your 2016 tax return, prepare for 2017 at the same time by creating a record-keeping system. Whether it’s sticking all your relevant receipts in a folder and paying someone to add them up later or keeping a running tally throughout the year, a sustainable system will save you time and headaches later on.

In the meantime, gather your records and add up your expenses on the table below. We’ve included a few additional categories that are relevant to some taxpayers.

However, keep in mind that this list should be used as a starting point and not a tax plan: the items noted here may not apply to your situation, and for some categories you will not be able to deduct the entire amount spent.

In other words, consider this a way to get going on the tax-planning process and to prepare for conversations with your accountant – or with your tax planning software.

Free Download Your Home is a tax Haven

Learn More

You know that your home can be a powerful part of building wealth, but are you taking full advantage?

Download our free guide to the tax benefits of home ownership.

Want to get a closer look at the rules governing the tax deductions described below? Click here to visit the complete guide to standard and itemized deductions published by the IRS.

Special Worksheet: My Deductible Expenses
Expense category        Total amount spent in 2016
Home mortgage and qualified personal property expenses
State and local income taxes*
State and local sales taxes*
Charitable contributions
Unreimbursed medical expenses
Unreimbursed employee business expenses
Work-related education costs
Non-business casualty and theft losses
Student loan interest and other qualifying interest payments

Let Us Help!

We can discuss this topic and more at a complimentary appointment. As a bay area retirement planning coaches, we can give you a review and make suggestions based on your retirement objectives.

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Important disclosures

The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by United Planners.

To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.

Neither diversification nor asset allocation can ensure a profit or prevention of loss in times of declining values. United Planners does not render tax advice.

Information for this article was compiled from the following resources:
https://www.irs.gov/uac/about-publication-17-part-5-useful-items
https://www.irs.com/articles/5-popular-itemized-deductions
https://www.irs.com/articles/2016-federal-tax-rates-personal-exemptions-and-standard-deductions
https://www.irs.gov/uac/newsroom/itemizing-vs-standard-deduction-six-tips-to-help-you-choose (please note the specific amounts shown are for a previous tax year)

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