Advertisement

Our coronavirus coverage is free for the first 24 hours. Find the latest information at tampabay.com/coronavirus. Please consider subscribing or donating.

  1. Business

Itemized deductions: What they are and how they can slash your tax bill

Itemizing is a way to pick and choose your tax deductions. Here's how it works and how to tell if it's for you.

Itemizing on your tax return can make a huge difference in your tax bill. But it's not necessarily a no-brainer. Here are some things you need to know about what itemized deductions are and what it means to itemize on your tax return.

- Itemized deductions are basically expenses allowed by the IRS that can decrease your taxable income. There are dozens of itemized deductions out there.

- The standard deduction, which is the itemized deduction's counterpart, is basically a flat-dollar, no-questions-asked reduction in your adjusted gross income.

- You can take either the standard deduction or itemized deductions on your tax return. You can't do both. The question is which method saves you more money.

- Here's what it boils down to: If your standard deduction is less than your itemized deductions, you probably should itemize. If your standard deduction is more than your itemized deductions, it might be worth it to take the standard and save some time.

What it means to itemize on your tax return

- Itemized deductions are basically expenses allowed by the IRS that can decrease your taxable income.

- When you itemize on your tax return, you opt to pick and choose from the multitude of individual tax deductions out there instead of taking the flat-dollar standard deduction.

Advantages of itemized deductions

- Itemized deductions might add up to more than the standard deduction. The more you can deduct, the less you'll pay in taxes, which is why some people itemize — the total of their itemized deductions is more than the standard deduction.

- There are hundreds of possible deductions. The IRS allows taxpayers to deduct tons of things, such as medical expenses, property taxes, charitable contributions and mortgage interest. There many, many more available.

- Some situations make itemizing especially attractive. If you own your home, for example, your itemized deductions for mortgage interest and property taxes may easily exceed the standard deduction, saving you money.

Disadvantages of itemized deductions

- You have to understand the rules. Some itemized deductions come with a few hurdles, of course. If you have medical expenses, for example, you can only deduct the portion that exceeds 7.5% of your adjusted gross income.

- You might have to spend more time on your tax return. If you itemize, you'll need to set aside extra time when preparing your returns to fill out the big enchilada of tax forms: the Form 1040 and Schedule A, as well as the supporting schedules that feed into those forms.

- You need proof. You need to be able to substantiate your deductions. That means keeping records and being organized. If you normally take the standard deduction and are thinking of itemizing when preparing your return next year, start saving your receipts and other proof for your deductions now.

What it means to take the standard deduction

Here are some big reasons people take the standard deduction instead of itemizing on their tax returns.

- It's faster. Taking the standard deduction makes the tax-prep process relatively quick and easy, which probably is one reason most taxpayers take the standard deduction instead of itemizing.

- It usually gets bigger every year. Congress sets the amount of the standard deduction, and it's typically adjusted every year for inflation.

- Some people get more (or less). The standard deduction is higher for people over 65 or blind, though filing status is still a factor. And if someone can claim you as a dependent, you get a smaller standard deduction.

- One note for married people: You can't take the standard deduction if you're married but filing separately and your spouse chooses to itemize. You both have to do the same thing — either itemize or take the standard deduction.

How to decide whether to itemize or take the standard deduction

- Here's what it boils down to: If your standard deduction is less than your itemized deductions, you probably should itemize and save money. If your standard deduction is more than your itemized deductions, it might be worth it to take the standard and save some time.

- Run the numbers both ways. If you're using tax software, it's probably worth the time to answer all the questions about itemized deductions that might apply to you. Why? The software or your advisor can run your return both ways to see which method produces a lower tax bill. Even if you end up taking the standard deduction, at least you'll know you're coming out ahead.

YOU MIGHT ALSO LIKE

Advertisement
Advertisement