The U.S. income tax system is complex and can be confusing, but it's also structured such that there are a lot of different ways you can reduce your tax bill. One of the most common ways to cut your taxes is by itemizing your deductions on your federal tax return, if you have enough qualified deductions to net a bigger tax break than the standard deductions you qualify for.
Since there are a lot of questions around this topic, we asked three of our top contributors to explain some things that could affect whether you should -- or shouldn't -- itemize your taxes.
Itemize or standard deduction?
Jason Hall: My colleagues will cover some of the biggest itemizable deductions below that, for most people, will be the key to determining whether itemizing or taking the standard deduction makes the most sense. To help get started, let's take a look at the standard deductions by filing status:
|Filing Status||Standard Deduction|
|Single or married filing separately||$6,300|
|Married filing jointly||$12,600|
|Head of household||$9,300|
The short answer to the question of whether to itemize or not: If deductions you could itemize are more than the standard deductions above, then you should itemize, because it will reduce your taxes.
What exactly is itemizing? In short, it's taking what you actually spent in a given tax year on certain qualified expenses and deducting the full amount from your taxable income when you file your tax return. Since your taxable income will be lowered, so will your taxes.
Below, Selena and Matt discuss the biggest and most common expenses that you can itemize. For most people, having one or more of these expenses will probably add up enough to justify itemizing.
If you have big medical expenses, you may want to itemize
Selena Maranjian: One reason why many people should itemize their taxes is if they have hefty medical expenses. That's because many such expenses are deductible. There are rules to follow, though, and itemization isn't automatically the best move. For example, you can only deduct the portion of your qualifying medical expenses that exceed 10% of your adjusted gross income (AGI). So if your AGI is $60,000 and you have $6,000 or less in qualifying medical expenses, you'll get no tax relief. If you have $7,500 in qualifying medical expenses, though, you can take a $1,500 deduction. That 10% threshold used to be 7.5% and those 65 or older get to use the 7.5% rate through the 2016 tax year. After that, it's 10% for them, too.
So what, exactly, counts as a "qualifying" medical expense? The IRS provides a long list of allowable ones, along with many examples of ones that don't qualify. Many allowable ones are related to the following: acupuncture, alcoholism treatment, ambulance rides, birth control pills, body scans, breast pumps, contact lenses, crutches, dental treatments, diagnostic devices, drug addiction treatment, drugs, eye exams, fertility treatments, health insurance premiums that aren't paid via your paycheck, hearing aids, home care services, home improvements, lab fees, long-term care, nursing services, pregnancy tests, prostheses, psychiatric care, psychological counseling, service animals, smoking cessation programs, surgeries, therapies, weight-loss programs, wheelchairs, wigs, and x-rays.
That's not a comprehensive list, though, and some expenses related to some of those items won't qualify -- a gym membership, for example, is not deductible, even if it's for weight-loss purposes. Other non-allowable expenses include teeth whitening, cosmetic surgery, hair removal, hair transplants, dancing lessons, maternity clothes, nonprescription drugs, and veterinary fees.
This can be a powerful deduction category for you if you have significant medical expenses, which is often the case if you have a high-deductible health insurance plan. Look into it to see whether it's worth itemizing your deductions to take advantage of it.
Homeownership expenses and charitable giving
Matt Frankel: While there are hundreds of potential tax deductions, most people who are better off itemizing have at least one of the "big three": high medical expenses, mortgage interest, and charitable deductions.
As Selena already discussed, you can deduct medical expenses in excess of 10% of your adjusted gross income. You can also deduct mortgage interest on up to $1 million from mortgages on your first and/or second home. And you can generally deduct charitable contributions as long as they add up to less than 50% of your adjusted gross income.
While most people who don't have any of the big three deductions are better off with the standard deductions, there are some situations where your other deductible items could be large enough to make itemizing worthwhile. For example, property taxes are deductible, so if you are single and paid, say, $7,500 in property taxes, it's a good idea to itemize.
Finally, it's important to mention that certain deductions can be taken whether you itemize or not. These include the tuition and fees deduction, the student loan interest deduction, moving expenses, and traditional IRA contributions, just to name a few of the most popular. Whether you itemize or not, you'll be able to take advantage of these.
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