3 benefits of itemizing your deductions on your tax return
You like to save money. You negotiate for lower rates on your cell phone bill, and you never buy a car without haggling with the salesman. So why would you not itemize deductions on your tax return? Only one-third of all Americans itemize deductions. For some, taking the standard deduction is the better route. But others haven't even examined their options. Which camp do you fall in? Running the numbers to see whether you should take the standard deduction or itemize makes sense for several reasons:
1. It May Reduce Your Tax Burden
The standard deduction is $5,950 for single filers, and $11,900 for those married filing jointly. If you itemize, however, you will add up individual deductions to see if you exceed the standard deduction for your filing status. In fact, many items you may not have considered are tax-deductible, such as education expenses, job-related moving expenses, and job hunting costs. And it's worth combing your records to find them. For example, if your marginal tax rate is 25 percent and your write-offs exceed the standard deduction by $1,000, you would net an extra $250. Check the IRS website for deductible expenses and limits.
2. You Can Gain a Better Understanding of Your Finances
Basic items you can write off also include charitable donations, interest paid on your mortgage, and a portion of non-reimbursed medical expenses. By understanding how much money you allot to various expenses, you can gain a better overview of your finances – which could help you save additional money. For example, once you see exactly how much you pay in mortgage interest, you may realize that refinancing your home mortgage is a wise decision. Or, if you have a great deal of non-reimbursed medical expenses, you may be better off opening a health savings account.
3. You Can Plan Better
By timing certain expenditures, you can better take advantage of specific deductions. For example, you can deduct non-reimbursed medical expenses that exceed 7.5 percent of your adjusted gross income. Therefore, if you are in need of a major medical procedure, you could save yourself a great deal of money by timing it correctly. If it's late in the year and you see yourself falling short of the 7.5 percent threshold, you may benefit by getting the procedure done before the tax year concludes so that a portion of the expense can be written off. On that note, this threshold goes up to 10 percent of your AGI starting in 2013.
Final Thoughts Streamline the process of itemizing deductions by keeping good records throughout the year. To do this, establish a simple filing system with the following categories: non-reimbursed medical expenses, job hunt expenses, non-reimbursed job-related expenses, education expenses, and charitable donations. Visit the IRS website for a complete list of deductible expenses. And as you pay each expense during the year, file your receipt, bill, or invoice under the appropriate category. Then, when tax time comes around, itemizing your deductions will be a breeze.
Have you ever tried itemizing your deductions? Were you able to save beyond the standard deduction?
David Bakke writes about personal finance topics including taxes and money management on Money Crashers.