When doing your taxes this year, it’s essential to ask yourself whether you should itemize deductions or take the standard deduction. The standard deduction has significantly increased over the past few years, resulting in fewer taxpayers benefiting from itemizing.
If your deductions exceed the standard deduction, you will reduce your tax burden by itemizing. On the other hand, itemizing is a time-consuming process that you may only want to go through if you know it is to your advantage.
For 2023, the standard deduction is:
- Single taxpayer: $13,850
- Head of Household: $20,800
- Married filing jointly: $27,700
If you are 65 or older or blind, your standard deduction is increased by $1,850 for a single taxpayer or head of household and $1,500 per qualifying spouse for married filing jointly.
Questions to Ask Yourself
You can make a quick assessment as to whether it is worth your time and effort to deal with itemizing deductions by asking yourself these five questions:
- Did I spend a significant portion of my income on medical bills and prescriptions in 2023?
- Do I own a home with a mortgage?
- Do I live in an area with high income and property taxes?
- Do I give a large amount of money to tax-exempt charities?
- Have I experienced any uninsured losses from theft, natural disasters, or other casualty?
If the answer to two or more of these questions is Yes, then it is worth your time to do a quick calculation to estimate your deductible expenses. Your most significant deductions and the easiest to determine are (1) your mortgage interest, (2) your property taxes, and (3) regular charitable donations.
Add these values. If the sum approaches your standard deduction, totaling all your deductions is most likely worth the effort. Otherwise, you are done, and you should take the standard deduction.
Itemizing Your Deductions
Medical Expenses: Multiply your adjusted gross income by 7.5%. You can only deduct medical expenses over this amount. If you think your medical expenses exceed this value, you will want to total all deductible expenses. Keep in mind that you can only deduct your out-of-pocket costs. Eligible expenses include:
- Health insurance, dental insurance, and long-term disability insurance premiums
- Doctor visits and prescriptions
- Medical tests, lab work, surgeries, and procedures
- Hospitalization costs
- Cost of eyeglasses, contact lenses, braces, dental appliances, crutches, wheelchairs, and guide dogs
- Mileage for trips to the doctor’s office, hospitals, and pharmacies.
State and Local Taxes:
- State income taxes paid. This includes taxes withheld from your paycheck and/or estimated taxes you paid in 2023. If your state does not have a state income tax or you elect not to deduct your state tax withheld, you can deduct state sales tax. This can be done using actual calculations of sales tax paid or by using the optional sales tax tables.
- Real estate taxes paid. Include only real estate taxes you paid on property you own that was not used for business. Typically, this is your primary residence, but it can only include taxes on a vacation or second home.
- Personal property taxes paid. These taxes are typically paid on cars, boats, motorcycles, and campers. You can only deduct the portion of taxes based on the value of the items.
Interest Paid: You can deduct mortgage interest and points on your primary home or second home.
- These costs can be associated with a first or second mortgage, refinanced mortgage, or home equity loan.
- For this purpose, your home can be a house, condominium, cooperative, mobile home, boat, or other property that provides sleeping space, toilet, and cooking facilities.
- Generally speaking, the loan proceeds must have been used to purchase, build, or substantially improve your home.
- Investment interest paid on money borrowed to purchase an investment property may also be deductible.
Gifts to Charity
Donations made to qualified charities can be cash, property, or out-of-pocket expenses for volunteer work done for the charity. Expenses include mileage, tolls, and parking fees incurred while volunteering.
- Deduct the value of any benefit you received from your donation.
- If you gave more than $250 to any one charity, you need a receipt from the charity to verify your gift.
Loss from Casualty or Theft
- You must complete Form 4684 for each loss.
- You may deduct only losses that were not recovered by insurance.
- If you have a qualified loss and you have decided against itemizing, you may be able to claim the loss by increasing your standard deduction.
Please note that this list of deductions is not comprehensive; it only covers the most common deductions. If you decide to itemize, you will want to review IRS Schedule A thoroughly for other possible deductions or discuss with your tax preparer.
Check back next week for options for filing your taxes for free.
Susan's Reflections 