Itemizing deductions is a tax filing strategy where you list eligible expenses that can be deducted from your taxable income. This approach serves as an alternative to opting for the standard deduction. It is usually preferred when the cumulative sum of individually itemized deductions surpasses the standard deduction amount applicable to your filing status. However, depending on the eligible expenses you incurred throughout the year, sometimes it’s better to opt for the standard deduction instead of itemizing, which can result in a better refund.
Here’s how it works:
- Step 1: Eligible Expenses: It is important to recognize the common deductions to determine which expenses can be itemized. These usually include mortgage interest, property taxes, state and local taxes, medical and dental expenses that surpass a certain threshold, donations to charity, and business expenses that were not reimbursed.
- Step 2: Schedule A: While preparing your taxes, the Tax Pro will fill out Schedule A (Form 1040) to list your itemized deductions individually.
- Step 3: Comparing with Standard Deduction: After totaling your itemized deductions, the Pro will compare this amount with the standard deduction for your filing status. If your itemized deductions are higher, your return will be itemized. Otherwise, Pro will prepare your tax, taking the standard deduction.
Things to remember while itemizing your deductions
- State Taxes: Some states do not allow itemized deductions or might have different rules. Check the regulations for your state.
- Special Considerations: Certain deductions, such as medical expenses, have limitations and thresholds. These expenses must surpass a specific percentage of your adjusted gross income (AGI) to be eligible for deduction.
- Documentation: Keep detailed records and receipts of these expenses. Proper documentation is crucial in case of an IRS audit.
Itemizing deductions can be more time-consuming and requires more detailed record-keeping than the standard deduction. It’s generally more beneficial for individuals with significant deductible expenses, like high medical costs, substantial charitable donations, or large mortgage interest payments.