Chances are, you want to complete your taxes as quickly as possible. After all, who wants to spend their weekend rifling through paperwork and crunching numbers?
Because of this, it’s tempting to always opt for the standard deduction. It’s faster and simpler, but selecting the standard deduction could cost you money.
According to TurboTax, one in four taxpayers pay fewer taxes because they itemize. The more property you acquire, the more you grow your charitable giving, and the more medical expenses you pay for, the more likely you are to benefit from itemizing your deductions.
Here’s how to tell which method is best for you.
Make sure the standard deduction is even an option for you
Not everyone is eligible for the standard deduction. If you don’t qualify, itemizing is your only option. You cannot take the standard deduction if:
- Your filing status is married, but you’re filing separately and your spouse is itemizing.
- You are filing a tax return for a period of less than 12 months due to a change in your annual accounting period.
- You are a nonresident alien or dual-status alien (with exceptions).
- You are filing as an estate or trust, common trust fund, or partnership.
If none of the above applies to you, you may claim either the standard deduction or tax itemized deductions. Here’s how to decide.
Determine the amount of your standard deduction
Your standard deduction depends on your filing status. For the 2016 tax year, the standard deductions are:
- Single: $6,300
- Married filing separately: $6,300
- Married filing jointly: $12,600
- Head of household: $9,300
If you’re not sure what category you fall into, use this tool to determine the amount of your standard deduction.
Determine which itemized tax deductions you can take
The itemized tax deductions you are allowed to claim depend on the type of expenses you had in 2016, and in some cases, how much those expenses add up to. The following questions can help you narrow it down.
1. Do you own a home or other property?
You can deduct mortgage interest payments, home mortgage points, real estate taxes, and personal property taxes. Through the 2016 tax year, you can also deduct qualifying private mortgage insurance premiums.
In fact, owning a home can have multiple perks come tax time. Here are five ways your mortgage can help your taxes.
2. What other income taxes did you pay?
State and local income taxes are deductible on your federal return. This includes taxes that an employer deducted from your paychecks, as well as estimated tax payments for self-employment income.
You may instead choose to deduct state and local sales tax, but you can’t deduct both.
3. Did you pay for your own health insurance?
If so, you can deduct your premiums. This is not the case, however, if your employer pays for your health insurance.
4. Did you have large unreimbursed medical bills?
You may be able to deduct medical and dental expenses, lab fees, hospital costs, prescription drugs, medical supplies, and more. There’s just one catch: The deductible amount is limited to whatever exceeds 10 percent of your adjusted gross income (AGI).
For example, if your AGI is $40,000, you can only deduct unreimbursed expenses exceeding $4,000. (Note that the percentage drops to 7.5 percent for those 65 and older.)
5. Did you make qualifying charitable donations?
You can deduct the dollar amount of a cash donation. For non-cash donations, you can deduct its estimated value, which you can determine by looking at how much a thrift store gets for such items.
Be sure to hold onto your receipts, and if the value is $250 or more, get a written acknowledgment. (You cannot deduct donations made to political organizations or candidates; other exceptions apply.)
If you’re not sure which donations are deductible, use this tool to find out.
6. Did you have large casualty or theft losses?
You may be able to deduct the loss of property due to theft or damage, as well as assets lost to a financial institution’s insolvency or bankruptcy. If the loss was covered by insurance, you cannot deduct it.
7. What other miscellaneous deductions might you qualify for?
The list of possible deductions is a long one, including many work-related expenses that you are not reimbursed for. However, the only way to deduct certain types of miscellaneous expenses is if their total is greater than 2 percent of your adjusted gross income.
Membership dues, subscriptions, protective work clothes, supplies and equipment, and continuing education relevant to your current job may all be deductible. You can also deduct the cost of preparing your taxes.
Refer to Publication 529 for a complete list of qualifying miscellaneous deductions.
Compare your itemized tax deductions to the standard deduction
Complete Schedule A. If your total itemized deductions are greater than your standard deduction, it is more cost-effective to itemize your deductions. In this case, you will file Schedule A with Form 1040.
If your standard deduction is greater than your itemized deductions, take the standard deduction. You will not include Schedule A with your return.
Of course, after reviewing the qualifying itemized tax deductions listed above, completing Schedule A may not even be necessary. It may be immediately obvious to you that itemizing will not exceed the standard deduction amount.
Whatever you do, don’t write off itemizing just because the standard deduction is easier. It’s worth the extra effort to save some money on your taxes.
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