When preparing for tax filing season, many people find themselves unsure about whether they need to keep a bunch of receipts for tax time. The concepts of 'itemizing' and 'standard deduction' can be confusing, resulting in either a loss of legitimate deductions or a waste of time tracking expenses that don't need to be kept.
So, how can you know if you should be itemizing your own taxes or not?
First, What Is Itemizing?
The term 'itemizing' tax deductions means breaking down actual deductible expenses in certain categories rather than taking a preset standard deduction on your taxes.
The standard deduction set by the IRS varies from year to year and reduces your taxable income by the following amounts (in 2014):
- Single: $6,200
- Married Filing Jointly: $12,400
- Married Filing Separately: $6,200
- Head of Household: $9,100
When Should I Itemize?
The answer to this question is simple. When the amount of deductible expenses (explained further below) is greater than the standard deduction for your filing status, it makes sense to go with your actual receipts. When your standard deduction is greater, it's usually not worth your time to itemize.
Generally, the most likely people to benefit from itemizing are taxpayers who have large medical expenses, are paying a mortgage for their primary home, or have a lot of non-reimbursed employee expenses.
Some taxpayers may be required to itemize if their spouse will be using this method and they choose 'married filing separately'.
How Do I Itemize?
Itemizing your expenses is done on Schedule A when you file your Form 1040 income taxes. The instructions for Schedule A list the allowable types of expenses you can generally deduct. These include
- Medical Expenses (find a list of qualified medical expenses here)
- Dental Expenses
- Real Estate Taxes
- Personal Property Taxes (including for registering a vehicle)
- Home Mortgage Interest
- Points (with income limits)
- Charitable Contributions (both in cash and in goods or services)
- Non-reimbursed Employee Expenses
- Tax Preparation Fees
- Investment Fees
If you plan to itemize, keep proof of payment throughout the year for the above expenses to use when filing taxes. This proof may include receipts, email or online confirmations, written statements from the payee or tax documents received in the mail.
There are some income limitations to what you may itemize as well as some other rules. For example, only the medical and dental expenses above 10% of your adjusted gross income may be claimed. Your tax preparer or accountant can help you determine the eligibility of specific expenses.
Although itemizing requires more effort during the year, the additional deductions can add up quickly. It may result in a tax savings of hundreds or more. Talk to a professional like Herman & Cormany.