Every year, when tax time rolls around, you have to decide if you will take the standard deduction or if you are going to itemize your deductions. If you plan carefully, you can maximize your deductions when you itemize.
It’s worth noting that many of your day-to-day expenses can be itemized as a deduction on your tax return. In the long run, this is going to help you save a lot of money. However, something worth noting is that unless you have many qualifying expenses, it may be best to take the standard deduction. This is what most taxpayers do.
Since you have the option to decide each year if you want to accept the standard deduction or not, you can choose to itemize in the years when it makes the most sense to do so.
It’s true; tax time can cause some stress. To help with this, you should try mood boosting probiotics and use the tips for making the most of your itemized deductions below.
Itemized Deductions Defined
Before diving into how to maximize your itemized deductions, it’s a good idea to understand exactly what this is and what it means.
Your itemized deductions are basically a list of the expenses you can use to help reduce the taxable income on your federal tax return. Usually, these deductions include taxes, interest paid on your home mortgage, medical expenses, and donations you have made to charity. If you decide to itemize your deductions, you will add up all the deductible expenses you have and then subtract this amount from your adjusted gross income. The number you get is your taxable income.
When filing federal income tax using Form 1040 (this is the form for an individual tax return), you can take the standard deduction or itemize your deductions (as mentioned above). The standard deduction is predetermined by the IRS and not something you have any control over. In most cases, if you plan to claim itemized deductions that exceed the standard deduction you qualify for, you should use the itemize option.
Now that you know what itemized deductions are, you can learn more about using these to maximize your return this year.
Categorize Your Deductions
Only some expenses are classified as itemized deductions on your taxes. If your goal is to maximize your deductions, you have to use the categories that the IRS has approved.
The expenses in some categories have to cross a certain threshold for them to be itemized. For example, you can only deduct them with dental and medical expenses if they exceed 7.5% of your total adjusted gross income. It is also important to note that this amount may change from one year to another.
If you punch your deductions, you can maximize the value you get from them. This is especially true for categories where you must cross a certain minimum threshold. For example, if you have medical costs each year that is equivalent to seven percent of your total AGI, you don’t get to itemize these. However, if the regular expenses can be pushed over to the next year, you may have over 10% of your AGI in total expenses in a single year, rather than just seven percent. In this situation, part of these expenses may be considered deductible.
Spend More When Itemizing
If you plan to itemize your taxes one year, it only makes sense to generate the most spending possible in the deductible categories to achieve maximum effectiveness. While it’s not advisable to spend just to generate deductions, if you have waited to make some purchases, it will make more sense to make the purchases during a year when you plan to itemize.
An example will be if you have been waiting to have specific medical treatments. You can maximize your deductions if you spend the money during a year when you have already surpassed the threshold (mentioned above) for the medical deduction.
Use a Checklist
If you take the same deductions every year, you may get in the habit of overlooking any other available options. If you keep a checklist handy of all the deductions you can take, it may help you find both every day and one-time expenses you can also deduct.
One example is with gambling losses. It is possible to deduct these up to the same amount as how much you have won. You may also take deductions for the charitable contributions that you make. However, it may also be possible to deduct your expenses and mileage for traveling to and from the charity.
Determining Your Total Tax Savings
When you use itemized deductions, you can reduce your taxable income. This typically means that you don’t have to pay as much in taxes. However, this is all dependent on what tax bracket you are in.
For example, if you are filing as an individual and made $100K last year, it puts you in the 24% tax bracket. However, if you claim $20K in itemized deductions, the net taxable income is $80K, which moves you down slightly to the 22% tax bracket. If your deductions were only $10K, you might pay less in taxes, but you would still be at the 24% tax rate.
Work with an Accountant
If you want to ensure you don’t have issues with your taxes this year, one of the best things you can do is to work with a professional accountant. This person can review your financial situation and help you figure out if the standard deduction or itemized deductions are right for your situation. This same professional will also be able to help you optimize your deductions to help you with your tax situation.
Another benefit of hiring an accountant is that they will be available to help you with financial-related issues throughout the year. This is invaluable and can provide you with the guidance and help needed, regardless of your tax situation. Being informed and understanding itemized deductions are going to help you make the most of your tax situation.