Detailed Deductions: What They Are and How They Work
When preparing for your taxes, breaking down the deductions is one way to reduce your tax liability.
What is an itemized deduction?
An itemized deduction is an eligible expense that you can claim on your tax return to reduce your adjusted gross income. By lowering your adjusted gross income, you could reduce the amount you pay in taxes.
When you file your federal income tax return, you have a choice of deductions: standard or itemized. In some cases, a standard deduction is the best option if you don’t have a lot of charitable contributions or health expenses.
However, some may not be eligible for the standard deduction. For example, if you are legally married but you and your spouse report “married separately” and they choose itemized deductions, the other partner will not be able to claim a standard deduction.
You may also not be eligible if you are filing a federal income tax return for less than 12 months or when a trust or estate is part of the income tax return.
In the meantime, in some cases it is better to use itemized deductions to reduce your taxable income. This is the case if you had big medical fees, suffered a serious loss of personal property due to a declared natural disaster, made charitable donations, or paid mortgage interest and property taxes.
The standard deduction differs depending on the filing status. Unless you paid large amounts out of pocket for qualifying deductions, your itemized deductions might not reduce your balance as much as the standard deduction.
|Filing status||Standard deduction for the 2020 tax year|
|Married spouse filing||$ 24,800|
|Separate marriage deposit||$ 12,400|
|Head of household||$ 18,650|
What constitutes an itemized deduction?
here is a IRS list indicating which expenses are considered itemized deductions:
How to claim itemized deduction
To claim itemized deductions, you want to use Planning a when filing a 1040 or 1040-R. You can use the instructions for completing Schedule A as a guide to help you understand which expenses are eligible.
You will also want to provide documents to support your evidence. For charitable donations over $ 250, you want to provide a statement indicating your donation (s). Your mortgage lender will provide you with Form 1098, provided the mortgage interest paid exceeds $ 600 for that year. Gather and make copies of all documents to verify the information provided in Annex A.
Advantages and disadvantages of itemized deductions
One of the advantages of itemized deductions is that you can claim more expenses. Therefore, if your itemized deductions exceed the amount of a standard deduction, you could reduce your taxable income. In return, you would have to pay less tax.
Conversely, while the standard deduction does not require any additional paperwork, itemized deductions do. You must provide proof that you incurred these expenses.
It is more difficult to make itemized deductions because there are certain limits you need to be aware of, especially when it comes to health costs. With that in mind, it can be a much more complex and time consuming process. If you’ve never filed itemized deductions before, you can seek help from a tax professional or use tax software to guide you through the process.