Tax season is in full swing, and many Americans are scrambling to maximize their tax deductions. Here are some ways you can make sure you get your biggest tax deduction, such as choosing the ideal filing status, deciding if itemizing is a smart idea, and taking advantage of the deductions you can take whether you itemize or not.
Choose the best filing status
There are four main filing statuses taxpayers can choose from:
- Married filing jointly
- Married filing separately
- Head of household
Most married couples are better off filing a joint tax return, with a few notable exceptions. For example, if one spouse would qualify for a medical expense deduction, but wouldn't qualify based on the couple's combined income, they may be better off filing separately.
The difference between single and head of household is not well understood by many people. Head of household essentially describes someone who is not married but has a dependent. Single parents are a good example of someone who would qualify for head of household status. Head-of-household filers qualify for an additional $3,000 standard deduction as opposed to single filers, so it's worth knowing if you qualify.
Decide if itemizing your deductions could save money
The majority of American taxpayers choose to take the standard deduction, and for good reason -- most people are better off using the "easy method" of calculating their deductions than itemizing. However, it's important to be 100% sure before you choose to take the standard deduction.
For the 2016 tax year, the standard deduction is $6,300 for single taxpayers and married taxpayers filing separately, $12,600 for married couples filing jointly, and $9,300 for head of household filers. So, for itemizing to be worthwhile, your individual deductions need to be more than the standard deduction that applies to you.
Now, there are literally hundreds of items you could possibly deduct from your taxes, but a good rule of thumb to determine whether itemizing could be worth it for you is to consider what I call the "big three" itemized deductions. These are:
- Mortgage interest: You are allowed to deduct the interest on your mortgage on a first and/or second home, on up to $1 million in total original principal balances. Your lender most likely sent you a tax document stating the amount of interest you paid in 2016, or you can probably find it on your lender's website. You can also deduct your property taxes and mortgage insurance (if applicable), so be sure to include these in this category.
- Charitable contributions: You can deduct donations of cash and property to qualified charities and nonprofit organizations. You can find the rules for these deductions here.
- Medical expenses: Here's the catch: You can only deduct medical expenses in excess of 10% of your adjusted gross income (AGI). So, if your AGI was $50,000 for 2016, you would need more than $5,000 to even qualify for a medical expenses deduction, and only the portion that's above this amount would be deductible. If you're over 65, this threshold drops to 7.5%. As you might imagine, only a small percentage of people qualify for this one, but for those who do, this can be a pretty big deduction.
Take advantage of the above-the-line deductions
Some tax deductions aren't really "deductions" at all -- rather, they are considered to be adjustments to income, and therefore can be taken even if you don't itemize deductions. These adjustments are also often referred to as "above-the-line" deductions. In other words, just because you decide to take the standard deduction, it's still important to save your documentation for these adjustments so you can take full advantage.
As of the 2016 tax year (the return you'll file in 2017), adjustments to income include:
- Deductible retirement account contributions, particularly those to a traditional IRA
- Moving expenses related to a new job
- Student loan interest
- Tuition and fees (If you don't qualify for one of the education tax credits)
- Alimony you paid
- Educator classroom expenses
Out of the adjustments on this list, one I'd like to discuss in a little more detail is the deduction for retirement contributions, which is perhaps the best way that you can still increase your tax refund this year.
Specifically, if you earn income, you are allowed to contribute up to $5,500 to a traditional IRA for both the 2016 and 2017 tax years, with an additional $1,000 allowed as a catch-up contribution if you're 50 or older. And depending on your income and whether you have a retirement plan at work or not, you may be able to deduct every dollar you contribute. The best part: You have until the April 18 tax deadline to make your 2016 contributions, so you can still take advantage of this deduction and boost the tax refund you'll get this year.
I've written before about how retirement savings is the smartest tax move you can possibly make, so if you're eligible for a traditional IRA deduction, it's an excellent way to maximize your tax deductions and put more money back in your pocket.