Questions about itemized deductions are common with taxpayers. During the preparation of personal tax returns, I often receive one or both of two common questions:
- Can I itemize and receive a larger deduction?
- The second question follows the first: What is deductible and what can be done to increase the itemized deduction?
First let me explain what the deduction is and how it is calculated.
The IRS allows taxpayers a deduction from income to offset personal expenses. When calculating the taxable income on a personal return, either the standard deduction is used or the itemized, whichever provides the highest deduction. The standard deduction is an amount that the IRS grants any taxpayer, regardless of income or expenses paid. Using the standard deduction simplifies the tax preparation for many Americans. For a taxpayer wishing to claim the itemized deduction, the deduction is based on a calculation of actual expenses paid. Therefore, for the taxpayer to receive a benefit from itemizing expenses on the tax return, the itemized expenses must exceed the standard deduction. The following example exemplifies this point. Taxpayers A & B are filing a joint return.
In this example, Taxpayer A would benefit from itemizing the expenses and claiming the larger itemized deduction on the tax return. Taxpayer B’s deductible expenses did not exceed the standard deduction, so the taxpayer would receive the greatest advantage by claiming the standard deduction on the tax return.
Is there anything that Taxpayer B can do to generate a larger deduction? Quite possibly, yes. The following tips can increase possibility of exceeding the standard deduction:
- Try to itemize your deduction every other year. This can be accomplished by deferring some elective expenses and paying them all in one year. Winter property tax bills are often issued in December. A tax payer could pay the tax in January plus pay the following winter tax bill in December. That will allow for an increase in deductible taxes paid. Some medical or dental procedures can be deferred. Taxpayers with children can benefit with this, as children often have preventive procedures that can be grouped together and all paid in the year the taxpayer is endeavoring to itemize. Gifts to charity are also given at the taxpayer’s discretion and can be given in the year desired.
- Be careful in recording all medical expenses. Medical expenses are all expenses paid out of pocket, including prescriptions, dental, eye and ear devices, amount paid to satisfy the deductible, mileage to medical treatment or treatment facility of a dependent, and of course insurance premiums.
- Keep good records of job related expenses. Job related expenses include uniforms or special clothing and equipment required for the job. If your employer has special requirements, such as steel toed boots or protective equipment that you are required to wear, but are not provided or paid for by the employer, keep good record of the expenses. Also, if you are required to leave the primary office and drive to a secondary place of work in your own vehicle, your mileage may be deductible if not already reimbursed by your employer.
- Charitable donations are often one of the items that increase expenses sufficient to itemize. Donations to Good Will or similar charity organization are deductible if properly documented. Large items can be donated as well. Organizations will accept cars, boats, or comparable donations. If donating items larger than $500, these need to be listed separately and items over $5,000 must follow specific IRS rules, so contact your tax accountant before finalizing the donation.
- Taxpayers who pay little state income tax may benefit from the deduction of sales taxes. Sometimes a large purchase, such as a vehicle can generate sales tax bill larger than the state income taxes paid. The IRS allows the taxpayer to claim either the state and local income taxes paid or the general sales tax paid.
- Job search and moving expenses may be deductible. Be sure to maintain a record of all expenses incurred. Discuss this with your tax preparer to see if your expenses qualify to a deduction.
Additionally, itemized deductions are limited to income thresholds and phase-outs. For example, medical expenses must exceed 10% of AGI before they become deductible. You should contact a tax professional for an accurate assessment of your deductible expenses and try to plan on ways you can increase your deduction for 2014 or 2015.
At BHT&D CPAs, we are committed to giving each client personal attention and spending the time needed to completely understand their circumstances. Please contact our office to meet with a professional and discuss your specific situations. Request a complimentary accounting consultation or contact us at (616) 642-9467.