All tax filers can choose to itemize or go by the standard deduction route. However, many people go by the option that gives them the maximum tax benefits. Also, many people's tax filing routes might have changed depending on the Tax Cut and Jobs Act of 2017. This article explores the basics of itemizing deduction and other essentials to know.
Itemized and Standard Deductions
Standard deduction allows you to deduct some money from your income tax. On the other hand, itemized deductions reduce your income using a set of qualifying expenses as approved by Uncle Sam. The route that gives the lowest tax bill is what most taxpayers use.
In 2017, President Trump made significant adjustments to the tax code, which reduced individual tax rates, increased standard deductions, and reduced the deduction level for medical expenses and others.
Singles and couples filing separately had their standard deduction value rise from $6,350 to $13,850 in 2023. The head of household's value went from $9,350 in 2017 to $20,800 after six years in 2023. Also, couples filing jointly had a $10,000 increase from 2017 to 2023.
A significant change that Trump made was the elimination of the $4,050 personal exemption, which people can claim for themselves and their dependents in 2017. As a result, itemizing deductions became a less attractive route for filers.
What Itemizing Deduction Means
Itemizing deduction involves listing expenses that will be removed from the adjusted gross income to bring down the taxable income. Itemizing is valuable if your costs for the year are above the standard deduction value.
However, not all expenses can be itemized. Uncle Sam has a list of approved services, products, and contributions that qualify. Here is a brief list of things you can deduct:
Fees for tax preparation
Interest on investment
Donations to charity
Dental and medical expenses
Employee expenses not reimbursed.
Mortgage loan interests
Theft, disaster, and casualty losses.
These deductions are also known as below-the-line deductions since they are removed from your Adjusted gross Income. In the same way, one can claim above-the-line deductions like IRA when you don’t itemize.
Who Should Itemize Deductions in 2023?
You can know if itemizing is the best route by simple calculations. Sum up all the expenses that qualify for itemizing. If the value of such deducted expenses is above the standard deduction value, itemizing will be your best route.
However, remember the fact that itemizing will require some work. You need to have your receipts intact for the year should Uncle Sam want to audit you. Keep in mind that the IRS can audit a return as far back as six years after filing. On the other hand, standard deductions require no calculation and the stress of keeping receipts.
Conclusion
For many people, you should itemize your tax if the enumerated value will be more than the value of your standard deduction. Since the TCJA changes doubled most of the standard deduction value for the 2023 tax year, as opposed to the 2017 tax year, some people who used the itemizing route six years ago (2017) might not benefit from itemizing if they do for their tax for the year 2022, and 2023.
You might think itemizing deduction will save you some bucks compared to the standard deduction route. Remember that it will demand your time, energy, and resources. For instance, keeping expenses and receipts for as long as six years is hard work. You must be prepared should Uncle Sam single you out for an audit.
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