When filing your federal income taxes, you have an option to either take the standard deduction or itemize. The standard deduction is just what it says – it is a flat amount of money you can deduct from your adjusted gross income before figuring your income tax for the year. Itemizing eschews the flat rate for specific items you actually paid during the tax year, which can also be used to minimize the amount of income tax.
The conventional wisdom has often been that wealthier homeowners can take the itemized deductions, because of the extensive mortgage interest and property tax deductions allowed, while poorer renters are better off taking the standard deduction. While this might be true as a generality, there are often many exceptions, so it makes sense for everyone, regardless of circumstances or income level, to review Schedule A – Itemized Deductions. Get a copy of the form from the IRS web site, www.irs.gov, and work through the page, line by line.
Even if you earn a modest amount of money, you might be able to itemize deductions (and take a larger deduction as a result) if you had extensive medical expenses. Interestingly, the amount of medical expenses that make this worthwhile does not have a set dollar limit, but in fact, is based on how much of medical expenses you paid exceeds 7.5 per cent of your adjusted gross income. This means that, even if you paid the same amount of hefty medical expenses as another person, if you earned less, you could see a greater benefit from this deduction. Someone earning $100,000 would need to have more than $7,500 in medical expenses to make this worthwhile, while someone earning only $50,000 would need medical expenses in excess of $3,750.
Another item often overlooked by non-homeowners are taxes paid. While homeowners can deduct property taxes, renters paying a lot of state and local income taxes may find that itemizing is worthwhile. Renters in states such as Ohio, for example, where many people pay local income taxes, may find that the 1 per cent to 2 per cent of income they pay in local taxes can make itemizing deductions advantageous, particularly since the amount of state income tax paid is also deductible.
Charitable contributions are also an itemized deduction. For most donations, you should have a receipt stating the value of the donation or a letter from the organization acknowledging your contribution. Non-cash contributions can complicate your return, but if you stuck mostly to writing checks, this can be relatively straightforward.
Lastly, both renters and homeowners alike have bad things happen to them. If you had property stolen or damaged during the year, it could be an itemized expense. This could be significant for renters, who often eschew renters’ insurance, or for homeowners who do not file a claim for a relatively minor problem that, if filed with their insurance company, could increase their homeowners’ insurance premiums or jeopardize their homeowners’ policy altogether. Don’t forget about this deduction, either, if you had your purse snatched or were a victim of identity theft and lost money as a result.
Of course, all of these deductions on Schedule A must add up to a significant sum to make it worthwhile. That means single filers will probably need to garner more than $5,000 (the standard deduction for single or married filing separately), while married couples will need more than $10,000 in itemized deductions to make Schedule A worthwhile.