For some taxpayers, filing taxes is very simple. Standard deductions for personal exemptions are all that they need to worry about. Those who have large medical bills, own a home or have work related expenses may wonder should you itemize deductions. Learn when this method may save money.
What is Itemization?
A tax deduction reduces your taxable income. Tax payers are given a choice as to whether they want to itemize taxes or choose the standard deduction, which is a set amount you can deduct from your adjusted gross income depending on your filing status, age, and whether or not you are someone's dependent. Itemized deductions are a breakdown of individual deductions that you can take depending on your personal situation that are added together to reduce your total taxable income. Itemized deductions can include (but are not limited to) the real estate property taxes you paid during the year, extraordinary medical bills, charitable contributions, and work related items you had to pay for out of pocket.
In order to itemize you have to file a regular 1040 form (the 1040EZ is only for individuals who plan to take the standard deduction) and fill out the Schedule A attachment. For some taxpayers, itemizing can make a significant difference in their annual tax liability. While itemizing is not for ever taxpayer, it can be very beneficial to those who have expenses that are extraordinary and in some cases, relate to their employment, their home or their marital status.
Who Should Itemize?
If you believe the total of your itemized deductions might exceed the standard deduction that you are eligible for, you should itemize when filing taxes. Generally, home owners should always itemize since there is a good chance that they have paid property taxes and real estate interest that will exceed the standard deduction. If you experienced an extreme casualty or loss during that tax year, than you should definitely look into itemizing. People who donate to charity on a regular basis and spend a lot on medical bills every year should also consider itemization. Additionally, if you are ineligible to receive the standard deduction, you should itemize taxes.
If you have had a major life change in the past year you should re-evaluate your deduction method, even if you've always taken the standard deduction in past years because you might save some money. However, it is important to note that there are those who cannot itemize their taxes, especially when it involves spouses who do not file a joint return.
- You may not file an itemized tax return if you and your spouse are filing separate returns and one spouse elects to not itemize deductions
- If you are changing your filing deadline (e.g., you started a home-based business) and have made changes to your filing year, you may not itemize deductions
- If you are a non-resident alien who must file a tax return, you may not itemize deductions on your tax returns
- Those who are filing on behalf of a trust or estate may not itemize deductions.
For those who do not have any of these issues, itemization may be very beneficial. Itemizing does mean longer preparation time, additional forms and carries the requirement to maintain impeccable records to show the IRS in the event of an audit, but the long-term financial benefit may outweigh the problems.
What Are the Pros and Cons of Itemizing?
It is very advantageous to itemize deductions when the total is significantly higher than the amount of your standard deduction. You pay less taxes, and in some cases (depending on income) may not have to pay any taxes at all. You can even deduct tax preparation fees from the previous year on an itemized form.
There are also other specific cases when you may benefit from itemizing your deductions including:
Uninsured losses - if you had a home or business loss as the result of fire, or other types of damage, you may benefit from itemizing your deductions
Home mortgage interest - those who owned a home should consider itemizing their deductions in order to take advantage of home mortgage interest deductions
Medical or dental expenses - if your medical or dental costs out-of-pocket exceed your personal deduction, there is a good chance that you can lower your tax liability by itemizing taxes.
The one downside to itemizing deductions is the amount of paperwork that is involved. You have to keep all of your applicable charity and purchase receipts, real estate tax forms, and details about your losses. As you can imagine, this makes for a more complicated and time intensive tax return and will cost you more in tax preparation fees. Your itemized deduction may also be limited depending on the amount of your income. Before you decide to itemize your deductions, make sure that you carefully review the Internal Revenue Service's rules on itemization. Additionally, you may want to speak with a tax professional to see if it will be worth the added expense to itemize.