It always makes sense to do whatever you can to save money on your taxes. One key decision that everyone has to make every year is whether to itemize their tax deductions or to take the standard deduction. In general, there's a simple answer that you can follow: itemize if it will give you a larger total tax break than you'd get using the standard deduction. However, if you want to get an idea before you do the long calculations to see if you're likely to be better off itemizing your tax deductions, there are some basic guidelines you can use to get you moving in the right direction. They won't always give you a perfect answer, but you'll be able to have a better framework for making an informed decision.
The first step: Know your standard deduction
In order to judge whether it pays to itemize your tax deductions, you first need to know the standard deduction you'd have if you don't itemize. The numbers vary by filing status and other factors such as age and whether or not you are blind. For 2016, the numbers are as follows:
|
Filing Status |
Standard Deduction for 2016 Tax Year |
|---|---|
|
Single |
$6,300 |
|
Married filing jointly |
$12,600 |
|
Head of household |
$9,300 |
|
Married filing separately |
$6,300 |
Data source: IRS.
However, there are some extra twists. If you're 65 or older, blind, or both, then your standard deduction will be higher. For single filers, the additional amounts are $1,550 for one condition or $3,100 for both. Joint filers get a $1,250 increase in their standard deduction for each condition, maxing out at $5,000 if both spouses meet both conditions.
On the other hand, if you're eligible for someone else to take you as a dependent for tax purposes, then your standard deduction could be lower. For dependents, the maximum standard deduction is either $1,050 or the sum of $350 and your earned income, whichever is higher. However, your standard deduction can't be larger than those listed above for non-dependents.
Once you know your standard deduction, that's the benchmark against which to measure your itemized deductions. That process is simpler if you focus on the largest deductions available.
The 4 big itemized deductions
For most people, there are four major itemized deduction categories worth looking at:
- State and local income tax, sales tax, and property taxes
- Mortgage interest and related housing expenses
- Charitable gifts
- Medical expenses
With two of these categories, you'll usually have a good idea going into the beginning of the tax year where you're likely to stand. If you own a home, then you'll typically have substantial property taxes and mortgage interest that you'll be able to claim at year-end. If you live in a state with high state income taxes, then you'll be able to estimate what you'll have to pay based on your expected income.
In addition, many people have predictable charitable giving patterns. You can often predict your deduction for your charitable gifts early on, even if you don't make them until closer to the end of the year.
Medical deductions are the toughest to estimate, but they're also the hardest to claim. Only those expenses above 10% of your adjusted gross income -- or 7.5% of AGI for those who are 65 or older -- count as itemized deductions. But if you have a chronic condition that requires consistent treatment, then you might be able to count on a baseline of medical expenses that will support itemized deductions.
There are other itemized deductions you can take, and in some cases, they'll be large enough to itemize all by themselves. For most people, though, looking at these four categories will tell you whether itemizing will make sense.
Traps for the unwary
There are also some special situations you have to keep in mind. If you're married and file separately, then you and your spouse have to coordinate your decision on whether to itemize. If your spouse itemizes, then you must as well -- even if it would give you a smaller deduction than the standard deduction.
Also, high-income taxpayers have to reduce their itemized deductions under certain circumstances. The reduction is 3% of the amount above certain income thresholds in the $150,000 to $310,000 range depending on filing status. Under no circumstances can your itemized deductions get cut by more than 80%, but in some cases, the reduction will make taking the standard deduction worth more than itemizing.
Getting the biggest refund on your tax return is an important goal that every taxpayer should follow. By being smart about itemizing, you can keep more of your money out of the hands of the IRS.
