How Itemizing Your Deductions Could Save You Thousands
Hey there, this story refers to the 2011 tax year. For the most up-to-date information covering the 2012 tax year, check out Could Itemizing Save You on Taxes? Find Out.
Though we all groan about having to pay taxes, the government is nice enough not to tax us on the full amount of our earnings.
There are two big buckets of deductions the government gives us: The first are called above the line, and the second are called below the line, which we’ll cover here. (The “line” these deductions refer to is a literal line on your 1040 form for the Adjusted Gross Income.)
Below the Line Deductions
Below the line deductions come in two types: One is called the standard deduction, and the second is called itemized deductions.
The Standard Deduction
The standard deduction is an amount of income that the government will not tax any taxpayer on. Most people take the standard deduction on their returns, which is worth anywhere from $5,800 to $11,600, and opt out of the whole process of itemizing. It’s as simple as saying, “I’m a single person (or married filing singly, or married filing jointly), and yes, I would like the standard deduction.” For some people, this is just fine. After all, that’s a lot of money, and taking just the standard deduction makes your taxes simpler and faster. What’s not to like? (Check out the chart below to find out what the standard deduction is for your filing status.)
|If Your Filing Status Is …||Your Standard Deduction Is:|
|Single or Married filing separately||$5,800|
|Married filing jointly or Qualifying widow(er) with dependent child||$11,600|
|Head of household||$8,500|
|*Do not use this chart if you were born before January 2, 1947, or are blind, or if someone else can claim you (or your spouse if filing jointly) as a dependent. Use Table 7 or 8 on this IRS page instead.|
Itemizing your deductions means listing out each deduction you qualify for. People do this when the sum of all their deductions is greater than the standard amount. Some things people might itemize include medical expenses, large charitable donations and mortgage interest payments.
But How Do You Know Which One Is Right for You?
At stake in this decision are savings in terms of money and time. For some people, taking the time to itemize could save them hundreds or thousands of dollars in taxes. On the other hand, people who don’t take the time to itemize could miss out on tax savings.
The most recent study in 1998 by the General Accounting Office estimated that 2.2 million people overpaid their taxes because they chose not to itemize. It seems many of us wrongly take the standard deduction because it’s easier, we forgot to keep records during the year or we assume we don’t have any deductions.
Then again, there are the people who decide to itemize even though it’s not worth it. They just made their lives needlessly more complicated (and expensive, if they relied on an accountant to do this for them) for no real financial benefit.
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Should You Itemize?
Here are some instances in when you should consider itemizing. Did you:
- Have large uninsured medical and dental expenses?
- Pay interest or taxes on your home?
- Have large unreimbursed employee business expenses?
- Have large uninsured casualty or theft losses?
- Make large charitable contributions?
And sometimes, you have no choice but to itemize, like when:
- You are married and filing a separate return, and your spouse itemizes deductions
- You are a nonresident alien or a dual-status alien
If you’re still not sure, take this quiz to find out if itemizing makes sense for you.
If you decide it makes sense for you to itemize, then get an accountant who can take on this task for you. And if you have more questions about deductions, our Ace Your Taxes Bootcamp goes into more detail on the subject.
More on Taxes From LearnVest
One of the most important numbers to know for your taxes: your Adjusted Gross Income. Find out how to calculate it with some easy questions.