Every year we are asked about itemizing deductions, and I think it's come to be a part of "doing" taxes that confuses people to no end... Should you take the time to find deductions (and/or keep up with them all year), or should you just take the standard deduction? These are the only two options, and the long & short of it is that if you don't have enough deductions to reach, and/ or surpass, the standard deduction it's not worth the time!
For the 2016 filing season basic standard deduction rates are:
-Single or Married filing separately $6,300
-Married filing jointly or Qualifying widow(er) with dependent child $12,600
-Head of household $9,300
-Dependents - Your standard deduction for 2016 is limited to the greater of: (1) $1,050, or (2) your earned income plus $350 (but the total can't be more than the basic standard deduction for your filing status).
*Don't use these numbers if you were born before January 2, 1952, or are blind, you have a whole other chart!!
Certain taxpayers can't use the standard deduction:
A married individual filing as married filing separately whose spouse itemizes deductions.
An individual who files a tax return for a period of less than 12 months because of a change in his or her annual accounting period.
An individual who was a nonresident alien or a dual-status alien during the year. However, nonresident aliens who are married to a U.S. citizen or resident alien at the end of the year and who choose to be treated as U.S. residents for tax purposes can take the standard deduction. For additional information, refer to Publication 519, U.S. Tax Guide for Aliens.
An estate or trust, common trust fund, or partnership; see Code Section 63(c)(6)(D).
What are deductions???
The most common deductions that help people get to the "magic number" are interest paid on your home, property tax, and medical bills.
Medical-You may be able to deduct expenses you paid the year for medical and dental care for yourself, your spouse, and your dependents. You may deduct only the amount of your total medical expenses that exceed 10% of your adjusted gross income or 7.5% if you or your spouse is 65 or older.
Medical care expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or payments for treatments affecting any structure or function of the body. Basically, anything that can be argued as being medically related, or is prescribed by a doctor.
Deductible Taxes-There are four types of deductible non-business taxes:
State, local, and foreign income taxes/ State and local general sales taxes - In a nutshell, you can add up the sales tax on ALL your receipts for the whole year, or you can use the handy table the IRS has made that is based on your annual income. Our computer system uses the table and automatically fills in the corresponding amount.
*Any big ticket purchase (vehicle, boat, rv, etc...) falls in this category!
State, local, and foreign real estate taxes-Deductible real estate taxes are generally any state, local, or foreign taxes on real property levied for the general public welfare. The charge must be uniform against all real property in the jurisdiction at a like rate. *This is for your house*
State and local personal property taxes- Deductible personal property taxes are those based only on the value of personal property such as a boat or car. The tax must be charged to you on a yearly basis, even if it's collected more than once a year or less than once a year. *This applies to the portion of your vehicle registration that is based ONLY on the vehicle value.
Home Mortgage Points- Points, also known as “discount points,” are fees paid directly to the lender at closing in exchange for a reduced interest rate. This is also called “buying down the rate,” which can, in turn, lower your monthly mortgage payments. This should show on the 1098 from your mortgage company.
Interest Expense- The money you pay to the mortgage company on your home (or rental house, but that's a whole other blog). This number will also be shown on the 1098 from the mortgage company.
Charitable Contributions- Any donation you make to a school, church, Goodwill, Red Cross, etc... You should have a receipt anyway, but if it's over $500 you HAVE to have one. Mileage to and from donating is also considered a contribution and can be itemized. Childcare while you are volunteering is NOT a deduction.
Misc. Expenses- There are a handful of miscellaneous expenses that can be deducted; tax prep fees for the previous year, safety deposit box rental, education expenses, publication expenses (related to work), and business use of home (work related). If you think you qualify for any of these, bring them to your tax prep interview!
Business Use of Home and Vehicle- Do you use your own vehicle to do your job? Commute mileage doesn't count, but if you check in at your office and then go to a secondary or temporary work site, OR if you carpool (this can be commute mileage) your mileage may be deductible. To claim this exemption, you need to be able to provide proof of mileage if asked, i.e. a log, or records of oil changes, etc...
Business Travel Expenses- Staying at a hotel overnight, paying for parking, toll roads, etc... if these expenses are incurred while doing work, then they may be deductible.
Business Entertainment Expenses- More than entertainment, this is meals and any other expenses you have while staying away from home, overnight, for work. This is also known as a stipend. If you don't have receipts for actual expenses, the government has set up a handy dandy chart based on location that gives a set amount per day.
Business Education Expense- This expense is to cover any classes, books, tutorials, etc... that educate you to better do your work. This is also where you would write off any Continuing Education required.
Employee Business Expense- These are other expenses you incur to properly do your job. A few examples of these would be FR clothing for the oil field, Scrubs for the medical profession, Safety glasses, Steel Toe Boots, etc... For clothing to be deductible it has to be something you couldn't wear on a regular basis, for example; business suits are not deductible because they are not specialty items. The general rule of this expense is one that you could NOT do your job without.
Casualty, Disaster, and Theft Losses (incl. Federally Declared Disaster Areas)-Generally, you may deduct casualty and theft losses relating to your home, household items, and vehicles on your federal income tax return. You may not deduct casualty and theft losses covered by insurance, unless you file a timely claim for reimbursement and you reduce the loss by the amount of any reimbursement or expected reimbursement.
This blog hits on the main things, and a few of the not main things, but is in no way an all-inclusive list. And as I mentioned in the beginning, if you don't have enough to cover your standard deduction, don't waste a lot of time gathering numbers.
In my professional experience, most people who are paying mortgage on their own home have a giant leap in the direction of being able to itemize.
As always, if you have questions consult your tax professional or call us!!