While you have to pay taxes on your income in the United States, you aren't taxed on every dollar you make. You may be entitled to some tax credits, such as the Child Tax Credit. These reduce your tax bill on a dollar-for-dollar basis, so if you'd owe $5,000 in taxes but get a $2,000 credit, you'll only owe $3,000.
You're also entitled to some deductions. Deductions work differently because they reduce your income so you're taxed on a lower amount. If your taxable income was $25,000 and you're entitled to a $2,000 deduction, you could reduce the income you're taxed on to just $23,000. The value of your savings is based on your tax bracket. If you're in the 12% tax bracket, a $2,000 deduction could save you $240.
Where do these deductions come from? You can claim a standard deduction, the amount of which is determined by your tax filing status. Or you could itemize, which means you deduct for particular expenses such as charitable contributions that you made or up to $10,000 in state and local taxes you paid.
You can't claim both the standard deduction and itemize, so you need to decide which approach provides the most savings for your situation.
Image source: Getty Images.
Thinking of itemizing? Make sure your deductions add up to enough
Every taxpayer is entitled to claim a standard deduction, so itemizing doesn't make sense unless the personal deductions you qualify for add up to more than the standard deduction. For 2020, the standard deduction is:
- $12,400 if you file as single
- $18,650 if you file as head of household
- $24,800 if you're married and file a joint return
- $12,400 if you're married and file a separate return.
Unless the combined value of all of your itemized deductions is greater than the amount applicable to your filing status, it wouldn't make sense to itemize. Not only would you end up with a smaller tax deduction, but doing your taxes would be more complicated.
Some of the potential deductions to add up to see if you should itemize include:
- Mortgage interest paid. Interest is deductible on mortgages up to $750,000 or up to $1 million for borrowers who purchased homes before Dec. 15, 2017.
- State and local taxes up to $10,000. This includes local income tax or sales tax as well as any property taxes you owe.
- Medical expenses that exceed 7.5% of your income.
- Deductions for charitable contributions.
You're allowed to deduct for certain things even when you take the standard deduction, such as student loan interest and any contributions you made to an IRA or health savings account. So don't factor those in when you're adding up the value of your itemized deductions to compare them to the standard deduction since you can claim them either way.
If you aren't a homeowner, have no medical expenses, didn't donate to charity, paid just $2,000 in local taxes, and have no other deductions, then it would make no sense for you to itemize. Your deduction would be well below the standard deduction no matter your filing status.
But if you're single with an expensive home, lots of donations, and high local taxes, with your itemized deductions adding up to $20,000, you'd be far better off itemizing. You'd be able to deduct an extra $7,600 from your taxable income.
Always add up your itemized deductions to see how much you can save
Unless you have few or no itemized deductions and are confident the standard deduction will save you more, it's a good idea to add up the total amount of deductions you could claim. By doing the math, you can find out what filing approach makes sense for you so you don't send the IRS any more of your hard-earned cash than you're required to.
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February 16, 2020 at 11:01PM
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This Is How Much Your Deductions Need to Add Up To Before It Makes Sense to Itemize - Motley Fool
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