Do I need to itemize?
Knowing when and how to itemize your expenses is key to maximizing your tax situation and your federal refund.
Here’s a look at itemized tax deductions and how to know if itemizing is your best option before the filing deadline.
What are itemized tax deductions?
An itemized tax deduction is any expense you can use to reduce your taxable income and, by extension, your federal tax bill. When you choose to itemize, all deductions you qualify for are reported on Schedule A of Form 1040 and subtracted from your adjusted gross income (AGI) to lower what you owe.
Ultimately, the amount itemized tax deductions will reduce your 2019 federal income tax depends on your tax bracket and filing status.
Do I itemize or claim the standard deduction?
Knowing when to itemize vs. when to claim the standard deduction means understanding which option makes the most impact on your federal tax bill. Because you can only claim one or the other, it’s crucial to know your tax situation and weigh both choices carefully before completing your federal return.
The standard tax deduction
The standard tax deduction is the easier of the two, as it’s a set amount based on your filing status.
For the 2019 tax year – for which you file in 2020 – standard deductions amount to:
$12,200 if you file as Single or Married filing separately
$18,350 if you file as Head of Household
$24,400 if you file as Married filing jointly or as a qualifying widow or widower with a dependent child
And because the standard deduction is adjusted each year for inflation, those numbers will climb to $12,400 (Single & Married filing separately), $18,650 (Head of Household) and $24,800 (Married filing jointly) for the 2020 tax season.
Itemized tax deductions
When the amount of allowable expenses is more than the lump sum standard deduction, itemizing your taxes is likely the best way to go. A seasoned tax preparer can help you sort through your expenses, determine what is tax deductible and ensure you choose the option that benefits your family the most.
Itemized tax deductions fall into several key categories:
- Home mortgage interest
- Mortgage insurance payments
- Charitable donations
- State and local taxes
- Medical expenses
- Losses resulting from casualty or theft
Note that the IRS updates the list of available itemized deductions each year.
Of course, you’ll want the option that saves the most money. But itemizing your expenses tends to be more work than claiming the standard deduction, something to note as you prepare to file.
What do I need to itemize my taxes?
Reporting expenses as itemized tax deductions means keeping track of all records, receipts and documentation that can validate your claims and prove everything is on the up-and-up.
If you plan to itemize, it’s important to have a number of tax documents at the ready, including:
- Check stubs
- Bank statements
- Medical bills
- Insurance bills
- Property tax statements
- Charitable donation receipts
Collecting and organizing expense receipts and records is paramount to itemizing and can make it much easier to tally up deductions when completing your return.
Common itemized tax deductions
There are many expenses that qualify for itemized tax deductions. Some of the more common include:
If you have a mortgage on your home, the interest you’re paying on that loan may be tax deductible. The total mortgage tax deduction is available on the interest paid on the mortgage’s average principal balance during the tax year up to $750,000 ($1,000,000 if the mortgage was secured prior to December 16, 2017) and allowed for two homes per taxpayer.
Private mortgage insurance
Thanks to the Further Consolidated Appropriations Act (2020), private mortgage insurance (PMI) premiums are now deductible up to the end of the year. This allows you to itemize any PMI premiums you paid during the 2019 tax year – as well as any PMI payments you make in 2020.
Additionally, the PMI itemized tax deduction may also be applied to the 2018 tax season, meaning you might be able to claim it by amending your 2018 tax return.
Any contributions you made to qualifying charities in 2019 may be allowable itemized tax deductions, such as cash or property donations made to your favorite nonprofit.
In many cases, charitable gifts of up to 100% of your AGI can be used to lower your tax burden, though different types of gifts face different AGI limits.
State & local taxes
The state and local tax deduction is one of the major incentives for itemizing, simply because state income taxes are only deductible when you itemize deductions. Those who paid a hefty state and local tax bill in 2019 may find considerable relief from this popular tax advantage.
And if you own your home, you may also deduct any property taxes you paid during the year (prepaid taxes are not tax deductible).
For 2019, the deduction for state and local taxes is limited to $10,000 ($5,000 if married filing separately.
Medical and dental expenses
Medical and dental expenses ate itemizable, though in a pretty limited way. Currently, you may only claim medical expenses exceeding 7.5% of your adjusted gross income, a relatively high threshold making it difficult for many to qualify.
Tax deductible medical expenses may include anything from necessary surgery and medical insurance premiums to prescription costs, physical handicap costs, doctor’s fees and medical-related transportation and more.
Passage of the Tax Cuts and Jobs Act (TCJA) limited the casualty and theft loss deduction to losses incurred due to natural disasters happening in federally declared disaster areas (as declared by the U.S. President).
Sorting through expenses and itemized tax deductions can get frustrating in a hurry, particularly with so many different rules and limitations on what you can deduct and what is out of bounds.
That’s where we come in. At Liberty Tax®, our seasoned tax pros are committed to helping you navigate the tax code and claim the deductions you need to maximize your tax 2019 refund. We help identify which tax deductions work best for your situation and ensure your return is in the best shape before the filing deadline.