We all want to lower our taxes, and deductions help us do just that. A tax deduction reduces the amount of your income that's subject to taxes. Depending on your filing status and the number of allowable expenses you can claim, it could make sense to take an itemized deduction over the standard deduction on your return. The key is to figure out which option gives you the most tax savings.
Standard vs. itemized deductions
You have two choices for taking deductions on your tax return: You can claim the standard deduction, or itemize your expenses in the hopes that doing so will result in a larger tax break.
Your standard deduction is a preset amount determined by the IRS based on your filing status. For 2017, the standard deduction is as follows:
- $6,350 for single taxpayers and married couples filing separately
- $12,700 for married couples filing jointly
- $9,350 for heads of households
If you opt for the standard deduction, you get to exempt that portion of your income from taxes regardless of how much you spend on tax-deductible expenses throughout the year. But while taking the standard deduction may be the easier route, it's not necessarily the most cost-effective. If your allowable expenses exceed your standard deduction, you're better off itemizing on your return and getting the bigger tax break.
Common expenses to itemize
In order to determine whether it pays to itemize on your taxes or stick with the standard deduction, you'll need to get a sense of which expenses are eligible. If you own a home, there are a number of expenses you can deduct. The mortgage interest deduction is a big one, especially during the early years of your mortgage when the bulk of your payments are going toward interest as opposed to your loan's principal. You can also deduct your property taxes, PMI premiums, and points on your mortgage.
Additionally, if you spend a lot on medical care, you can deduct your expenses provided they exceed 10% of your adjusted gross income. Furthermore, you're allowed to deduct any charitable contributions you make throughout the year. All you need to do is donate goods or cash to a registered charity and retain a receipt for your donation.
If you're self-employed, you might take advantage of other deductions. Not only can you write off equipment and supplies used to run your business, but you can also write off a portion of your home expenses if you have a dedicated space that's used solely for business. You can also take a mileage deduction if you use your vehicle for business purposes and thoroughly document your trips.
Finally, under certain circumstances, you can deduct the cost of looking for a job or moving for the purpose of taking a new job. And, if you borrowed money to attend college, the interest you pay on your student loans is deductible to an extent.
Which option is right for you?
Figuring out whether to take the standard deduction or itemize can be a challenge, so if you're not sure which move is best for you, you can use this helpful calculator to get some guidance:
This tool allows you to input your tax information and expenses to determine which option will save you the most money. If your itemized deductions exceed your standard deduction, it pays to itemize. If not, stick to the standard deduction. It's really that simple.
Remember, too, that just because you decide to itemize one year doesn't mean you should automatically do it every year going forward. Your finances can change over time, so it pays to run these calculations whenever tax season rolls around to see what makes the most sense.
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