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Itemized Deductions: A Guide
Itemized deductions can be a powerful tool to reduce your taxable income and lower your tax bill. However, understanding which expenses qualify and how to maximize your deductions is crucial. In this post, we’ll guide you through the process and highlight common deductions you might overlook.
What Are Itemized Deductions?
Itemized deductions are expenses that you can deduct from your taxable income. Specifically, you can opt to itemize instead of using the standard deduction for your filing status.
If your itemized deductions exceed your standard deduction, consider itemizing. For 2024, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly. Therefore, taxpayers with significant expenses, such as high medical bills or mortgage interest, often benefit most.
Types of Itemized Deductions
Medical and Dental Expenses
Medical and dental expenses must exceed 7.5% of your AGI to be deductible. You can only deduct unreimbursed expenses not covered by insurance. For example, prescription drugs, hospital care, and dentures are eligible expenses.
State and Local Income Taxes (SALT)
This deduction includes property taxes and state income taxes. However, the SALT deduction is limited to $10,000. Additionally, foreign real estate taxes are not deductible. Consequently, taxpayers with high SALT payments may find this limit restrictive.
Mortgage Interest
Mortgage interest is deductible on the first $750,000 of a mortgage on a primary or secondary home. If your mortgage originated before December 16, 2017, the limit increases to $1 million.
Charitable contributions
Donations to qualified organizations are deductible. However, the deduction is limited to a percentage of your AGI depending on the type of donation. Any excess amounts can be carried over to future years.
How to Itemize Non-Cash Donations
When donating non-cash items, such as clothing, household goods, or vehicles, ensure you obtain a written acknowledgment from the charity. This should include the donation’s name, date, and value. If non-cash contributions exceed $500, you must file Form 8283 to detail the items donated. Additionally, proper documentation is crucial for large donations.
How to Keep Track of Itemized Deductions
Use a Dedicated System: Set up a folder on your computer to organize receipts and records. While keeping paper records is important, they can get lost. Scan receipts and save PDF copies of records to have a computer copy of your documentation. You can also use a budgeting app if scanning receipts and saving PDFs is more difficult. Overall, this can help you keep organized.
Track Expenses Monthly: Regularly record itemized expenses to avoid last-minute confusion. This habit simplifies year-end calculations as well as lighten the workload.
Categorize Expenses: Group expenses by type, such as medical or charitable, for easier reporting. This can make calculations become more manageable.
Retain Statements: Bank and credit card statements can help cross-check expenses. Consequently, overlooked deductions are less likely.
Benefits of Itemizing Deductions
Itemizing can lead to significant tax savings, especially for those with high deductible expenses. Moreover, it provides greater transparency into your financial situation, enabling better planning. Consequently, taxpayers often feel more in control of their finances.
Disadvantages of Itemizing
Generally, itemizing can be time-consuming and requires detailed recordkeeping. Additionally, the IRS may request documentation to verify deductions. Returns with unusually high deductions compared to income are more likely to be audited. Therefore, maintaining organized records is essential.
No Longer Deductible Expenses
Since 2018, certain expenses, such as investment fees and unreimbursed employee business expenses, are no longer deductible. These include union dues, business use of a car as well as business travel expenses.
However, some states still allow deductions for these types of expenses. Therefore, check your state’s tax rules.
Your Next Steps to Maximize Itemized Deductions
In conclusion, itemized deductions are an essential part of tax planning. By understanding what qualifies and tracking your expenses carefully, you can maximize your deductions and lower your tax liability. However, tax laws and limits change frequently, so staying informed is critical.
If you need help maximizing your deductions, don’t hesitate to contact DuPage Tax Solutions for expert guidance.
References
2023 Instructions for Schedule A (2023) | Internal Revenue Service. https://www.irs.gov/instructions/i1040sca#en_US_2023_publink53061xd0e1551
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