Deductions reduce the amount of taxable income when filing a federal income tax return. In other words, they can reduce the amount of tax someone owes.
Most taxpayers have a choice of either taking the standard deduction or itemizing their deductions. The standard deduction may be quicker and easier, but, itemizing deductions may lower taxes more, in some situations. It’s important for all taxpayers to look into which deduction method best fits them.
New this year
Following tax law changes, cash donations of up to $300 made by December 31, 2020 are deductible without having to itemize when people file a 2020 tax return.
Here are some details about the two methods to help people decide deduction to take:
The Internal Revenue Service advised taxpayers that the doubling of the standard deduction due to tax law changes is likely to reduce the number of taxpayers who normally itemize.
This is the sixth in a series of reminders to help taxpayers Get Ready for the upcoming tax filing season. The IRS has recently updated its Get Ready page with steps to take now for the 2019 tax filing season.
In previous years, about one out of three taxpayers itemized. The IRS expects that number to be less for tax year 2018. The Tax Cuts and Jobs Act (TCJA) passed in December 2017, significantly affects deductions in several ways, impacting those taxpayers who normally itemize.
The list of miscellaneous itemized deductions is an odd mixture of various deductions that didn’t fit anywhere else in the tax code. It includes items such as losses from Ponzi-type investment schemes, tax preparation fees, and certain safety deposit box fees. There does not seem to be much rhyme or reason to why these deductions were all lumped together.
Perhaps because these deductions are so obscure, the new Tax Cuts and Jobs Act (TCJA) has suspended miscellaneous itemized deductions for all tax years beginning before January 1, 2026. Taxpayers who previously took advantage of these deductions will now be out of luck.
If your tax deductions normally fall short of itemizing your deductions or even if you are able to itemize, but only marginally, you may benefit from using the “bunching” strategy.
The tax code allows most taxpayers to utilize the standard deduction or itemize their deductions if that provides a greater benefit. As a rule, most taxpayers just wait until tax time to add everything up and then use the higher of the standard deduction or their itemized deductions.
If you want to be more proactive, you can time the payments of tax-deductible items to maximize your itemized deductions in one year and take the standard deduction in the next. Read More
Certain types of interest you pay are deductible as an itemized deduction. The types of interest you can deduct on Schedule A are home mortgage interest, points in some cases, and investment interest.
Home Mortgage Interest
Home mortgage interest is the most common interest deduction on a typical Schedule A, and is any interest that you paid on a loan secured by a main home or a second home. To qualify for the home mortgage interest deduction, the following rules apply:
• You must be legally liable for the loan. Therefore, you cannot deduct interest payments you make for someone else if you are not legally liable to make those payments. Read More
Certain taxes you have already paid are allowable as itemized deductions. To be deductible, these taxes must have been imposed on you personally, and you must have paid them during the year. The following taxes you paid during the year are deductible as itemized deductions on Schedule A:
• State and local income taxes.
• Real estate taxes (deductible in the year you paid them).
• Personal property taxes charged on the value of personal property.
• Foreign income taxes paid.
Not all taxes paid, however, are deductible. Note carefully, then, that the following taxes are Read More
You can claim a deduction for medical and dental expenses you incurred, but as a word of caution, you should expect a deduction, only if you incurred major unreimbursed medical expenses during the year. This is so, because you can deduct medical expenses only to the extent that they exceed 10% of your adjusted gross income (AGI).
For example, your AGI is $50,000 and your medical expenses total $6,000. Since 10% of $50,000 is $5,000, you can only take a deduction of $1,000 ($6,000-$5,000). The criteria for applying this restriction, from the government’s perspective, is to prevent taxpayers with large salaries from claiming expenses they can certainly afford, while benefiting lower income taxpayers who are burdened by unforeseen medical costs. Read More
In preparing your tax returns, you are allowed the choice of either claiming the standard deduction, or claiming itemized deductions. Your deductions (standard or itemized) are subtracted from your adjusted gross income (AGI) to figure your taxable income. Depending on which choice gives you the greater benefit, you may choose to take your standard deduction, or you may choose to claim itemized deductions; the aim here is to maximize your refund or minimize your tax liability.
The Standard Deduction
The standard deduction is a fixed dollar amount that the government allows taxpayers who do not itemize deductions to deduct from their income. The standard deduction reduces the amount of income that is taxed, and eliminates the need for many taxpayers Read More