When Do I Itemize My Deductions?

Your first question:
When do I itemize my deductions?

When you have enough itemized deductions.

Your next question:
How do I know if I have enough itemized deductions?
Add up your deductions.

Either Standard Deduction or Itemized Deductions, Whichever is More
After you add up your W-2, Interest Income, Self-Employment Income, and whatever other kinds of taxable income you have, IRS allows you to subtract about $8,000 from your total income before figuring your tax. This is called the "Standard Deduction" and you can use it no questions asked!. It is called "Standard" because everyone may use this no-questions-asked deduction. I said "about" $8,000 because it changes a little each year. For a single person, the Standard Deduction is about $5,000.
Choosing Itemized Deductions Instead
Imagine this discussion: IRS: Congress says that you can take a reasonable deduction for things like medical expenses, charitable contributions, and home mortgage interest. So, just deduct a flat $8,000 on your tax return. You don't have to prove anything. It's like the middle square on a bingo card. You just get it, no questions asked. You: Thanks! That's easy! IRS: You're welcomed. You: But what if I have more than $8,000 in those things that you mentioned? IRS: Fine, OK, whatever. Make an itemized list but NOW FOLLOW THE RULES! We tried to make it easy, so if you think $8,000 is not enough, fine. Make the list and add it up and deduct that instead of the easy amount. You: Thanks! I think I can do that! So, what are the rules? IRS: Get Schedule A and read the instructions. You: Can't you just tell me? IRS: NEXT!
Adding Up Your Itemized Deductions
The simple thing to do is to roughly add up your itemized deductions. If it comes close to or is more than your standard deduction, then you will want to fill out Schedule A or have your tax return preparer do it. But before you ask your tax return preparer to do so, see if you have enough to bother about.
  1. Add up only the medical expenses that you had to pay for because insurance did not pay.
  2. Add up your W-2 gross salaries and other income. Multiply this by 7%.
  3. Subtract the 7% from the total. If the answer is less than zero, then you can't count any medical expenses as Itemized Deductions.
  4. If the result is more than the 7%, write down "MEDICAL EXPENSES" and the answer beside it on a sheet of paper.
  5. If you cannot deduct medical expenses, do not be surprised. You have to have serious medical expenses to overcome that 7% rule. Continue to see about the other deductions.

Add up the following:
  1. The state tax withheld on your W-2's.
  2. Property tax.
  3. Add up these two, write down "TAXES" and the total beside it on the sheet of paper.
  4. Sales tax does not count.

  1. If you have a church contributions statement, set that aside.
  2. For now, do not bother to reckon "Let's see, I go to church 3 of 4 Sundays, and I always put $10 in the plate...."

  1. If you have any bank statements of interest that you paid the banks(Forms 1098), set them aside.
  2. If you bought or refinanced your house during the year, find the settlement sheet. See if you paid any "points," usually called a "loan origination fee."
  3. Set these aside.

  1. Unless you have a lot of expenses as an employee (licenses, supplies that you have to pay for, etc), don't even bother in this phase.
  2. Mileage to work and from work is not deductible.
  3. If you are not reimbursed for miles driven from job to job, to customers, or errands for your employer, multiply the mileage by 34 cents a mile. If you do not have a log of each day's business trips showing where you went and the miles, do not bother to add it up.

Add Up Your Estimated Itemized Deductions
Add it all up. Add up the Medical after the 7% rule, the Taxes, the Contributions, the Interest paid on your home mortgage, and the Miscellaneous (if any) If it is over $8,000 or even close to $8,000, then you should itemize. How much are deductions worth?
A salesman once took several customers and me to dinner at a nice restaurant to show his appreciation for our business. After the dinner, I overheard one of the guests say how nice it was for the salesman to do this for us. "Oh?" said the other, "Well, it's not costing him anything. He can write it off on his income tax return."
Too many people believe that the deductions they take are subtraced dollar-for-dollar from the tax bill. They must think that if they have a deduction of $100, then their refund goes up by $100 (or their bill goes down by $100). This is WRONG, WRONG, WRONG. It works this way:

  • Add up your total income and subtract the deductions.
  • Look up your tax bill in the IRS table.
  • Let's say that your taxable income is $30,000.
  • Tax on $30,000 is 15%.
  • Your tax bill is $4,500.
  • IT'S A MIRACLE! After figuring your tax, you suddenly find another $1,000 in deductions. Now you have to do it over again only this time you are hoping that the tax bill will be $3,500.
  • You subtract the $1,000 from $30,000 and get $29,000 taxable income.
  • Your tax rate is still 15%, so the tax on $29,000 is $4,350.
  • The $1,000 of additional expenses only saved you $150.
  • Deductions only go against taxable income--NOT directly against the tax.

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