With the increased standard deduction in 2018, many taxpayers will not need to itemize their deductions to get the maximum tax benefit. If you're not sure, here's some helpful tips about itemized deductions.
#1 You typically have to have a lot of medical expenses before they are deductible. In order for your out-of-pocket medical expenses to be deductible, they have to exceed 7.5% of your Adjusted Gross Income (AGI). So, if your AGI is $50,000, then you can only deduct medical expenses over $3,750. Medical expenses can include payments to doctors, hospitals, dentists, prescriptions, and even some health insurance premiums. Be care though, because if your premiums are deducted through your employer or your expenses are paid through your Health Savings Account, they don't qualify.
#2 You can deduct your state income tax, or your sales tax, but not both. The sales tax option could be beneficial in years where you have large purchases like new cars or RVs. You can also deduct your property taxes; however, the IRS is capping your tax deduction at $10,000. So, if your state income or sales tax, and your property are over $10,000, you deductions will be reduced.
#3 You can deduct the interest on your home mortgage as long as the principle on your loan is under $750,000. If you bought your home before December 14, 2017, then your loan can be up to $1 million. The new tax laws have eliminated the deduction for home equity debt, even if you used the loan to purchase your home. Currently, your Private Mortgage Insurance (PMI) premiums are still deductible as well.
#4 Your donations to charities are deductible. The rules for charitable donations were not substantially changed by the new tax laws, though with the higher standard deduction, more taxpayers will not itemized their deduction and receive an additional tax benefit from their donations. Many taxpayers are benefiting from combining donations in alternating years. For example, if you normally donate $5,000 a year to charity, consider donating $10,000 in one year and none in the next to maximize your tax benefit.
#5 The miscellaneous itemized deductions are no longer allowed. In prior year, employees could claim a deduction for unreimbursed employee expenses. This was particularly beneficial to W-2 employees that drove a semi truck or employees that paid for their own travel or qualified home office. Beginning in 2018, this deduction is no longer allowed.
If you are not sure whether or not taking the standard deduction or itemized deduction will be better for your tax situation, continue to save your receipts and talk to your tax adviser. If you don't have a tax adviser, give us a call! We'd love to answer your questions.