In filing your federal tax return, you can decide to go through the itemized deduction channel or standard deduction method. Standard deduction involves some values defined by Uncle Sam for taxpayers based on their filing status (single, head of household, etc.). If you don’t qualify for one, you can go with the other.
Finding your taxable income
To get the value of your taxable income, one needs to subtract the value of the itemized or standard deduction from the AGI – Adjusted Gross Income. The idea of these deductions is to bring down the overall taxes one has to pay.
Understanding Itemized Deductions
Itemized deductions involved various expenses that one incur for the tax year. When you sum these expenses, and they are greater than the value set forth by the standard deduction amount, itemizing is your best bet,
Here are some expenses that fit the itemized deduction:
Medical expenses
Investment interest expense
Charitable contributions,
Home mortgage interest
State, local, and property income taxes
Home Mortgage Interest
For people who bought a house by taking a mortgage, the mortgage's interest can be deducted as an itemized deduction.
Many people qualify for this deduction since one can engage it until the first $1,000,000 borrowed as a mortgage. A limitation of two residencies per taxpayer exists.
One can also deduct a home equity loan provided the loan is below $100,000
Taxes
People that own a house can deduct the value of the real estate taxes they pay on their home. One, however, cannot deduct taxes yet to be paid. Only the taxes scheduled for the year of the tax you are filing can be paid.
There is also the opportunity to deduct state and local taxes (aka city taxes) paid on the tax year's income. This is one of the strong and positive points of itemizing since most taxpayers pay their state income tax, and only itemizing allows such deduction.
Investment Interest Expense
For someone who wants to start investing, there are typical expenses like advisor or broker fees. Itemized deduction also allows you to deduct these.
However, one needs to be careful as the deduction amount is limited to what you earned through the investment. As a result, years in which you did not have a profit leaves you with zero deductions for the expense.
Medical Expenses
One can deduct medical expenses as itemized deductions even though limited. The medical costs allowed for deduction is the value that is 10% above your AGI. The value is 7.5% for people above 65.
For instance, you have your AGI at $60,000 and your medical expenses for the year are $56.500, you can only deduct 600 USD (60,000 X 0.1 = $600).
Some medical expenses qualify like physician's fee, necessary surgery (cosmetics not included), prescriptions, transport to the hospital, etc.
Charitable Contributions
People that gave their property or money in a tax year to charity are gifts that can be deducted as an itemized deduction. This also includes tithes paid to the church.
You cannot include contributions to needy families and political campaigns in the deduction. The recipient organization for your donation must be qualified before you can claim the deduction. This deduction is limited to half of your Annual gross Income for case donation and 30% for donations of properties.
Miscellaneous Deductions
Uncle Sam also allows one to claim some miscellaneous deductions even though one can deduct such by the value with which they exceed 2% of the value of your Annual Gross Income.
These are fees for tax preparation, educational expenses that qualify, business expenses not reimbursed, business use of your residence, costs for job hunting, professional journal sub, etc. The IRS has a comprehensive list, so be sure to contact them if you have any questions.
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