By Peter G. Robbins, CPA, The Daily Record Newswire
Q: Can you explain the advantages of itemizing deductions versus taking the standard deduction? And what exactly can I take as an itemized deduction?
A: When filing your individual tax return you have a choice of itemizing your deductions or taking the standard deduction that the Internal Revenue Service publishes each year, whichever is better. In 2013 the standard deduction for a single person is $6,100, and for married couples it is $12,200. Those who are legally blind or 65 or older are eligible for a larger standard deduction. But a dependent child will often have a reduced standard deduction if income is not from personal earnings. Other special rules can also apply, so it is important to check the instructions to the tax forms carefully to determine the proper amount to claim.
Through the years Congress has deemed certain expenditures to be tax deductible. Here is a brief rundown of the itemized deductions allowed.
Medical and dental expenses
Many, but not all, medical and dental expenses paid for you, your spouse and your dependents, excluding amounts covered by insurance, are deductible. You can’t “double dip” by claiming expenses paid with money from pre-tax plans such as Health Savings Accounts or Flexible Spending Accounts. After unreimbursed expenses have been totaled, they are only deductible to the extent the total expenses exceed 10 percent (7.5 percent if you are 65 or older) of your adjusted gross income. This is a significant hurdle, and generally only those incurring significant medical expenses will benefit from this deduction.
Taxes
Many taxes you pay, but not all, are also deductible. Generally, you are allowed to deduct either the state income tax (whether paid directly or via payroll withholding) or sales tax paid during the year, whichever is greater. Those living in a state without an income tax can opt for the sales taxes paid or a standard amount published by the IRS.
Other taxes, such as real estate taxes paid on your home or other properties and personal property tax, can also be deducted. Unlike medical expenses, the deduction for taxes is not subject to a threshold.
Interest
Much of the interest you pay, but not all, is also deductible. Interest paid on home mortgages or home equity loans is deductible (with some limitations), as are mortgage insurance premiums and points paid when you take out the original mortgage on your property. Investment interest is also deductible, but is generally limited to the amount of investment income you report. But beware: Personal interest, such as interest paid on credit card debt and car and boat loans, is not deductible.
Charitable contributions
Most, but not all, contributions are deductible as long as the recipient is a legitimate charitable entity and the donation is properly documented (e.g., the taxpayer has a receipt for each donation of $250 or more). Any noncash gifts must be separately reported, and for gifts more than $500 taxpayers must file a separate form (Form 8283). An appraisal is needed if the noncash gift is in excess of $5,000. Finally, giving more than half (or in some cases even less) of your income may also trigger separate limitations.
Casualty and theft losses
If you are the victim of a theft or if you had property damaged during the year, you may receive some tax benefit by deducting the loss. These situations are not all that common and the rules can be complex.
Miscellaneous deductions
A deduction is also allowed for many, but not all, other expenditures, such as unreimbursed employee expenses; tax preparation fees; certain job-hunting expenses; some work clothes, uniforms and tools required for your job; union dues; and work-related travel. These deductions are generally only allowed to the extent they exceed, in the aggregate, 2 percent of your adjusted gross income.
Your total itemized deductions can be further limited depending on your filing status and income. Don’t stop after totaling up these various deductions. Apply the limitations, compare the total to the standard deduction, and take the best answer. Happy deducting!
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To ensure compliance imposed by IRS Circular 230, any U.S. federal tax advice contained in this article is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed by governmental tax authorities. The answers in this column are meant to offer general information. You should consult your tax adviser regarding the specifics of your situation.
Peter Robbins is a partner in the Boise, Idaho, office of CliftonLarsonAllen LLP, specializing in tax matters for small businesses, individuals, and trusts and estates.
Have a question for Robbins? Email your question to news@ idahobusinessreview.com. Enter “Talking Tax” in the subject line.
