Thursday, January 15, 2015

When should you itemize deductions? / Sometimes the answer is obvious, sometimes it isn't

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Using the “short form” is the quickest and easiest way to file your tax returns and millions of taxpayers use it. But with that form you can't itemize deductions, you must take the Standard Deduction.
At some point taxpayers may have deductible expenses and think they should drop the short form and go with the standard Form 1040, so that they can take advantage of those deductions.
But sometimes they shouldn't. According to the Internal Revenue Service (IRS), you should only itemize deductions if your total deductions are greater than the standard deduction amount.

Standard Deduction

For the 2014 tax year, the standard deduction for a single taxpayer is $6,200 and $12,400 for a married couple filing jointly. That's what a taxpayer may deduct from their income without itemizing any expenses.
That means if a couple purchased a home at the beginning of 2014 with a mortgage of $140,000, they probably paid a little more than $5500 in mortgage interest last year. They could itemize deductions and write off the $5,500.
But just because they can, doesn't mean they should. If they itemize they can't take the Standard Deduction. If the mortgage interest is the only deductible expense they have, they're taking a $5,500 deduction and giving up a $12,400 one.

Consider all deductions

That said, there may be several other expenses you incurred through the year that could also be write-offs, if you itemize deductions. Besides mortgage interest on your home, you can also deduct the taxes paid.
If you have significant uninsured casualty or theft losses, that could add to the deduction total. If you have large uninsured medical or dental expenses or large un-reimbursed employee business expenses, itemizing may be in your best interest.
The key number is the standard deduction. You probably shouldn't itemize if your total expenses don't exceed it.

Tax bracket

A secondary consideration is your tax bracket. If you are in a high tax bracket, a deduction is worth more than if you are in a low bracket.
Here's an example. John and Loretta have a taxable income of $80,000. That puts them in the 25% bracket, meaning they pay 25% of their income in taxes.
George and Linda earned $195,000. That puts them in the 33% tax bracket.
Each dollar of itemized deductions will save John and Loretta 25 cents while George and Linda will realize 33 cents.

When it's not obvious

Sometimes the decision to itemize or not is not that obvious. That's when you should seek help from tax experts. They may lean toward itemizing because, frankly, filling out the long form and itemizing usually results in higher fees than just filing with the short form.
But TurboTax says 1 out of 4 taxpayers will end up paying less in taxes when they itemize. The company points out that other considerations, like age, can affect your bottom line tax.
H&R Blocknotes there might be cases when your itemized deductions are less than your standard deduction, but it still makes sense to itemize. It says you might want to do this if itemizing on your state return provides a savings that more than makes up the difference on your federal return.
Meanwhile, the IRS says it will begin accepting returns electronically on Jan. 20. Paper tax returns will begin processing at the same time.


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