As we all know, careful tax planning can help you maximize your deductions. When preparing your taxes, itemizing deductions may be one way to significantly lower your tax liability.
Read on to find out if the itemized deduction is the way to go for you, and learn when and how to itemize your deductions to really maximize your tax savings.
What are itemized deductions?
Essentially, itemized deductions are deductible expenses approved by the IRS that can lower taxable income. By choosing itemized deductions, you’re able to pick and choose from a huge range of individual tax deductions out there instead of taking the flat-dollar standard deduction.
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What are the different types of itemized deductions?
Itemized deductions cover a variety of expenses that are only deductible when you choose to itemize.
Listed below are seven of the most common itemized tax deductions.
1. Home mortgage interest deduction (HMID)
According to the Tax Cuts and Jobs Act (TCJA), homeowners can deduct the interest paid on up to $750,000 in mortgage debt if they took out a mortgage after December 15, 2017 (before this law was passed, you could deduct up to $1 million.)
2. Charitable contributions
How you can deduct from a charitable contribution depends on the type of asset donated and the charity organization you donate to. Remember, not every recipient charity organization is qualified under the tax law, so make sure to check if you’ve donated to approved tax-exempt charities carefully.
Here is a useful link to help you do your research:
3. IRA contributions deduction
Your contributions to a traditional IRA are deductible. However, this isn’t the case for contributions to a Roth IRA.
Your eligibility for IRA contributions deduction is determined by your filing status, income, Social Security eligibility, and access to a workplace retirement plan. You can contribute up to $6,000 and deduct it from your taxes in 2021 and 2022, and if you’re 50 or older, you can add another $1,000 to that.
4. Medical expense deduction
As of 2021, you can deduct only eligible, unreimbursed medical expenses that exceed 7.5 percent of your adjusted gross income (AGI). For example, if your AGI was $60,000, you wouldn’t be able to deduct any amount lower than $4,500 in eligible medical expenses.
Some common examples of non-deductible medical expenses are those that are covered by your insurance or employer. Aesthetic operations are also generally unapproved by the IRS. Nonprescription medications (excluding insulin) and other purchases for general health, such as toothpaste, health club dues, vitamins, diet food, and nonprescription nicotine products, are normally not deductible. Medical expenses paid in a previous year are likewise not deductible.
For a complete list of tax-deductible and non-deductible medical expenses, check out IRS Publication 502.
If you have clicked the link and feel unmotivated by the long texts, don’t worry! The IRS has created a free tool for you to check if your medical expenses are deductible.
5. State and local taxes deduction (SALT)
The state and local tax (SALT) deduction allows taxpayers who itemize their federal tax returns to deduct certain state and local taxes. Property taxes plus state income or sales taxes, but not both, are capped at $10,000 per year under the Tax Cuts and Jobs Act (TCJA). However, it’s only $5,000 total if you are married and filing taxes separately.
6. Rental property tax deductions
Apart from the obvious profit that your rental property may bring, you can also deduct the expenditures of owning, running, and maintaining the property on your tax return.
For instance, a popular rental property tax deduction is the allowance for depreciation. You can properly deduct that depreciation every year over the total useful life of your rental assets. However, the math is usually complicated, so it’s best if you can seek professional advice.
Furthermore, only when your rental property fits the following criteria will you be able to depreciate your property:
- The property is yours.
- You use the property for your business or to generate income.
- The property has a determinable useful life
- You anticipate the property lasting longer than a year.
- The property was not put into operation and was later disposed of (or no longer utilized for business) during the same year.
7. Student loan interest deduction
The maximum interest deduction for student loans is $2,500. If your adjusted gross income is beyond $80,000 — or $165,000 if married filing jointly — you can’t take the deduction.
Unlike most other deductions, the student loan interest deduction is claimed as an adjustment to income on Form 1040. This means you don’t have to fill out a Schedule A, which is used to itemize deductions, to claim it.
There’s also a free tool provided by the IRS to help you figure out how much student loan interest you’re eligible to deduct.
How can I claim itemized tax deductions?
Firstly, file all your expenses on the appropriate lines of Schedule A, figure out the total of your itemized deductions then copy that number to the second page of your Form 1040. You then will be able to know your final taxable income by subtracting the deductions from your income.
What type of receipts do I need to keep for itemized deductions?
If you opt to itemize your expenses, the IRS requires you to keep supporting documentation to prove that you did spend those expenses for the purpose you claimed on your tax return. This is because if the IRS has any suspicion regarding your tax claim, they would need those records to find out whether your filing was honest or not.
While the IRS doesn’t specify exactly which receipts you must keep, you should keep every record that can serve as concrete evidence of purchase, from sales slips and invoices to deposit slips and canceled checks.
A smart way to organize your receipts
Itemized deductions can save you a lot of money from Uncle Sam, and it’s important to do your taxes correctly in the event of an audit.
If you’re tired of spending hours and hours collecting and categorizing receipts by yourself, we’re here to tell you there’s a super easy alternative to that. It’s Shoeboxed.
Shoeboxed is a receipt management application that turns your receipts and business documents into a digital format in just one click by taking a picture straight from your smartphone or scanning a pdf. It automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes.