The Ins and Outs of Itemizing Your Deductions

March 20, 2024 by First Federal Bank

taxes-1When filing your income taxes, you have the option to take the standard deduction or to itemize your deductions. Itemizing allows you to claim specific expenses individually, potentially leading to a higher tax refund or lower tax liability. So while itemizing can be more time-consuming than taking the standard deduction, it can be financially beneficial if you have significant deductible expenses. Let's explore the ins and outs of itemizing your deductions, helping you understand the process and determine if it’s the right choice for you:
Consider the standard deduction
Before choosing to itemize your deductions, it’s important to know the alternative: taking the standard deduction. This is a fixed amount set by the IRS that reduces your taxable income. Available to all taxpayers, the amount varies depending on your filing status. “The 2023 standard deduction for taxes filed in 2024 is $13,850 for single filers and those married filing separately, $27,700 for those married filing jointly, and $20,800 for heads of household,” write NerdWallet tax experts Sabrina Parys and Tina Orem. It may only be worth itemizing your deductions if you believe it would reduce your taxable income even further than the standard deduction.
Identify eligible itemized deductions
To determine if itemizing is the right choice for you, assess your eligible deductions and their total value. Common itemized deductions include state and local taxes, medical expenses, charitable contributions, mortgage interest, and certain job-related expenses. However, keep in mind some deductions are limited based on your adjusted gross income. For example, medical expenses can generally be deducted only if they are more than 7.5% of your AGI for the tax year. For charitable gifts, Parys and Orem say that, “Per the IRS, you can generally deduct up to 60% of your adjusted gross income.” For taxes, you are limited to $5,000-$10,000 depending on filing status for a combination of property, state income, local income, and sales taxes.
Gather extensive documentation
Gathering documentation is critical when itemizing deductions. You’ll need to keep records and receipts that support each deductible expense you plan to claim. For example, if you intend to deduct charitable contributions, make sure to keep receipts or acknowledgment letters from the qualified organizations. If you are claiming deductions for job-related expenses, keep records of those expenses and be ready to substantiate them if necessary. “If the IRS examines any of your tax returns, you may be asked to explain the items reported. A complete set of records will speed up the examination,” says the IRS. Because documentation can be so critical, it is helpful to have anticipated well ahead of time that you will be itemizing deductions — or to always keep documentation regardless of how you plan to file your taxes. It can’t hurt.
When considering itemizing, remember state tax rules differ from federal tax rules. Some states have their own standard deduction amounts and itemized deduction rules. You’ll need to review your state’s tax guidelines to understand the potential impact of itemizing on your state tax return. Because of this, and because of the potentially significant time and documentation requirements of properly itemizing your tax deductions, it is highly recommended you work with a tax professional to help you prepare and file your taxes.

Categories: Financial Education

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