Tax Tips for First-Time Itemizers

Kimberly Rotter for CreditCardInsider.com writes: It's nearly tax time. What form are you planning to file? The IRS offers guidelines about which form to file here. You will use either the 1040EZ (the simplest form), the 1040A or the 1040.

The very first change you will make when you start itemizing deductions is the form you use to file your tax return. If you have no dependents, you are not planning to itemize deductions and you meet certain other criteria, you can use the 1040EZ. Your tax preparation will be very easy and probably accomplished in a matter of minutes. If you meet certain other criteria, such as limited adjustments and credits and income under $100,000, you can use the 1040A. Again, you may take only the standard deduction. If, however, you decide that it is to your advantage to itemize your deductions, you must file your return using form 1040.

2013 Tax Rates and Standard Deductions

What's the difference between standard and itemized deductions?

The standard deduction is the dollar amount that the IRS lets each taxpayer deduct from his or her taxable income, thereby reducing the amount of tax we each pay. For example, if your net income was $50,000 and you take the standard deduction for a single adult, you'll only pay taxes on $43,900.

For 2013, the standard deduction for single adults and married people who file separately is $6,100. For a married couple filing jointly, it is $12,200. For those who qualify as Head of Household, the standard deduction is $8,950. Additional amounts are added to the standard deduction for taxpayers who are over 65, blind, or married to someone who is over 65 or blind.

Who should itemize?

The decision to itemize is not a style choice. It is a mathematical calculation. If the sum of your itemized deductions is greater than the standard deduction for which you are eligible, you should itemize. Certain life events make it more likely that you'll save money by itemizing. Tax experts agree that once you buy a home, you're likely to benefit from itemizing. When you take a mortgage, the tax-deductable mortgage interest alone could surpass (or put you very close to) the standard deduction amount for at least the first few years, and often well beyond.

If you are a homeowner, chances are excellent that you should itemize. Mortgage interest and the property tax deduction alone would normally put you over the standard deduction. Jaime Campbell, CPA, MBA of Tier One Services, an information technology and financial coaching consulting firm

Homeowners often have enough to itemize with just mortgage interest and real estate taxes. Michael Carney, CPA of MWC Accounting

Individuals who have mortgages on their homes, who pay property taxes and who make charitable contributions would normally itemize. Felecia Dixson, AGC-Alfermann Gray & Co. CPA's, LLC

How do you find out whether itemizing makes sense for you?

We asked a few pros for tax tips for those who are wondering if it's time to itemize. They agree that the only way to make the decision to itemize or not is to crunch a few numbers and see if your itemized totals rival the standard deduction.

The two biggest potential deductions are mortgage interest / property tax expenses, and medical / dental expenses. Jaime Campbell

Campbell further explains that while medical expenses are not a huge financial concern for most young people who are considering itemizing for the first time, they "can come into play if income is low and medical expenses are unusually high in a particular year." She notes that medical and dental expenses must meet a new, higher threshold starting in 2013 – they are only deductable to the extent that they exceed 10% of your adjusted gross income (AGI), and only that portion that exceeds 10% of your AGI is deductable.

"If you're thinking of scheduling an unusually high amount of medical care," advises Campbell, "schedule all of the care to occur in a single calendar year (if it's medically feasible to do so). That will increase the chance that the expenses will meet the threshold for the year and become at least partially deductable."

Talk to your tax professional. He or she will be able to tell you if you can itemize or not. Michael Carney

Carney cautions taxpayers to learn about the Alternative Minimum Tax (AMT) because it affects allowable itemized deductions. Each year, taxpayers must pay either the AMT or regular income tax, whichever is greater. The percentage of households who pay the AMT rises along with income bracket.

What are some of the most common itemized deductions?

Mortgage interest and property taxes paid for your primary residence. Homeowners should receive a statement from the mortgage servicer showing the total amount of interest paid last year, as well as a statement from the mortgage lender or the tax assessor's office showing property taxes paid. Publication 530, Tax Information for Homeowners

Health insurance premiums for the self-employed. Self-employed taxpayers enjoy a special benefit. They can deduct health insurance premiums even before itemizing. In other words, self-employed people can take the standard deduction and deduct the full amount of the health insurance premiums they paid (including for plans purchased on the national or state health care exchange). Publication 535, Self-Employed Health Insurance Deduction

Medical and dental expenses. So long as they total more than 10% of your income, you can deduct that portion of the expense that exceeds 10% of your income. If you are over 65, the threshold is only 7.5% through 2016, and then rises to 10%. Publication 502, Medical Expenses

Charitable contributions. Cash and noncash donations to nonprofit organizations are deductable. Topic 506, Charitable Contributions

State income taxes. If you owed state taxes last year, you can deduct the amount you paid from your taxable income. But the unfortunate flip side of the coin is that if you received a refund, it'll be added to your taxable income. Publication 17, State and Local Income Taxes

Unreimbursed employee expenses. If you buy special uniforms and/or shoes for your work, pay fees for licenses, or drive on the job, you might be able to deduct those expenses. "Items required for your profession that are not reimbursed by an employer might be deductable," explains Dixson. Publication 5289, Unreimbursed Employee Expenses

What are some less common deductions?

Moving expenses. If you move for work purposes, whether you're an employee or you're self-employed, you might be able to deduct all of the expenses related to the move.Publication 521, Moving Expenses

Educator expenses. Teachers can deduct certain unreimbursed expenses incurred for materials used in the classroom. Topic 548, Educator Expense Deduction

Business use of the home. If you use part of your home exclusively and regularly as your principal place of business, you can deduct certain expenses. Until this year, anyone taking the home office deduction had to fill out a 43-line form that required complex tracking of a variety of expenses. A new law eliminates the complexity. Anyone who prefers not to keep such meticulous records can choose a simplified home office deduction of $5 per square foot, up to 300 square feet (for a maximum deduction of $1,500). The old method has no cap. No matter how you take the deduction, be sure you fully qualify and that you maintain supporting documentation. To be eligible, a home office cannot be a guest room or used for any other non-work purpose. Publication 587 (2013), Business Use of Your Home

State and local sales taxes. You can always choose to itemize sales taxes but most of us don't keep a record of the everyday transactions in which we pay those taxes. If you made a very large purchase that wasn't financed, check your records. The sales tax you paid could go a long way toward surpassing the standard deduction. Sales Tax Deduction Calculator

Nontraditional medical expenses and medical miles. If you received nontraditional medical care, including acupuncture treatments or smoking cessation, those expenses are deductable. Also deductable are meals and lodging, as well as mileage, if those expenses meet IRS guidelines, such as meals in a hospital when the primary reason for being there is to obtain treatment, and 24 cents per mile (or actual out of pocket expenses) when you use a car for medical reasons. "Hardly anyone takes advantage of medical miles," observes Campbell. But you are entitled to deduct your mileage traveling to and from medical visits for yourself or a dependent. All of these are subject to the 10% threshold. Publication 502, Medical Expenses

Tax preparation fees. If you pay a tax professional to prepare your return, you can deduct that amount from your taxable income. Publication 529, Tax Preparation Fees

Mileage for volunteering. "You can deduct 14 cents per mile when you volunteer for some non-profit organizations," says Carney. 2013 Standard Mileage Rates

Gambling losses. "You can only deduct losses if you have winnings, and only up to the amount of your winnings," says Dixson. Topic 419, Gambling Income and Losses

Are there any pitfalls to itemizing my deductions?

Switching from the EZ form to itemized deductions is not an act that will trigger an audit.

There are no red flags inherent in itemizing. Jaime Campell

The potential pitfall is the cost versus the benefit of taking the time to gather all of your records. "If it's not likely you'll meet the threshold, don't waste the time calculating the numbers," she advises. Campbell also suggests that once you decide whether to itemize, don't bother recalculating until something significant changes in your financial picture. "Most peoples' situations don’t drastically change from one year to the next."

"The downside to itemizing is that you must keep track of your receipts, whereas if you take the standard deduction, there is nothing to keep track of," Dixson points out. "Furthermore," she notes, "the IRS will never select your return for audit for the standard deduction alone. (You could be selected for an audit for another reason, though.)"

You should also be aware of the pitfall of itemizing deductions without proper records to back them up. "Always document your deductions," stresses Carney. "Whether it is in a spreadsheet or handwritten on a piece of paper, make sure you can support he deductions you take." Don't make up numbers. Claim only what you can prove. If you are audited and found to have taken improper deductions, you'll get hit with penalties in addition to the back taxes you owe.

Do your research and use numbers that you can support under scrutiny. Michael Carney

It's all in the paperwork

Know that if the IRS ever decides to audit you, the auditor will simply want paperwork to back up the entries on your return. Don't fudge the numbers. Keep your records until the statute of limitations for audits runs out. For federal tax returns, the statute of limitations is three years. For some states, it's four or five years. If you under-report your income, the IRS can go back six years. If you claim a loss for bad debt or worthless securities, the can go back seven years. And if you neglect to file a return or you file a fraudulent return, there is no statute of limitations at all.

Know that  the burden is on you, the taxpayer, to keep all records, including receipts, mileage logs, account statements and any other documentation you rely on to arrive at your numbers. Get into the habit of filing or scanning receipts. Consider learning and using consumer or small business financial software, and even hiring a competent tax professional to help you file. Tax professionals worth their salt can identify money-saving tax strategies that average taxpayers are unaware of, simply because it's their job to do so and they deal with tax issues every day.