Tax prep time can fray your nerves, especially when you’re trying to figure out the nuances of the tax code, gather your information and receipts, do accurate calculations, and determine how to handle your deductions. Should you itemize or not?
To itemize or not?
You have a choice when it comes to your tax return and your deductions — standard deduction or itemization. “The standard deduction is a preset amount that you are allowed to deduct from your taxable income each year. This amount will vary according to your tax filing status and is indexed annually to keep up with inflation,” according to Mark P. Cussen of Investopedia.com.
Each has their benefits, but it’s up to you to determine what works best for you and your finances. One can save some time while the other may bring a greater reward. “Now one thing you should know about the ‘standard deduction versus itemize’ debate is that the overwhelming majority of tax filers go with the former, mostly because it ends up being the most lucrative,” reports Maurie Backman, writer for The Motley Fool @CNN Money. “The danger of taking the standard deduction, however, is potentially losing out on extra tax savings that may come with itemizing.”
According to Cussen, if you earn a high income and have several large expenses you’re planning to deduct on your return, itemizing is probably the way to go.
Above-the-line deductions
The IRS gives you an option that blends the best of both options — deductions you can claim without the hassle of itemizing on your paperwork. “These deductions are known as adjustments to income or above-the-line deductions, since they appear on Form 1040 above your adjusted gross income,” according to Backman.
To reap the benefits of deductions without the hassle of itemization, Backman notes you’ll need line items that fall into these categories — contributions to your IRA, contributions to your HSA (health savings account), expenses you incur as a teacher like purchasing classroom supplies, and interest on student loans.
Additional categories include penalties from early withdrawals from a certificate of deposit, contributions to your retirement account as a self-employed professional, and business expenses if you’re a performing artist or retain a specific position as a government worker, according to Amanda Dixon, writer for SmartAsset.com.
Your civic duty can also be financially rewarding. “Whatever you earn from jury duty for instance, counts as a write-in adjustment if you gave that payment to your employer, because the employer paid your salary while you were away on jury duty,” she adds.
Below-the-line deductions
Itemized deductions are often referred to as below-the-line deductions. According to Julia Kagan of Investopedia.com, itemized deductions filter into several categories — medical and dental expenses, taxes you paid, interest you paid, charitable donations, property losses from theft or casualty in a disaster area declared by the federal government, and miscellaneous.
Another category involves your abode in terms of your mortgage loan and/or the interest on your home-equity loan. Certain losses due to gambling can also be deducted, Cussen notes.
Seek assistance from a professional
Deciding to itemize or not is a complicated decision, especially if you are managing many assets or a complex portfolio or economic decision. When in doubt, seek advice from a tax professional who can help you sift through the possibilities and the changing rules so you’re getting the biggest return possible.