Welcome to your Skimm on tax deductions.
I’m so intrigued.
We thought so. Deductions: When the gov cuts you a break for some things, and gives you discounts on your taxes. Deductions help lower how much of your income is taxed and could give you a bigger refund. So you're going to want to pay attention.
There are two types: standard or itemized. The new tax code Congress passed last year nearly doubled the standard deduction for every taxpayer. And placed some restrictions on itemized deductions. If your itemized deductions came out to more than the standard deduction last year, it might not be the case again this year – so make sure you double check your total itemized deductions before filing. Or ask an expert for help.
- Standard: Nice and easy. You get a flat-rate discount based on three things: if you’re single or married filing separately (smallest discount), if you’re what’s called a head of household (medium-size), or if you’re married filing jointly (heyyy $$$). Pros: simple, no extra work, and the IRS pinky promises not to ask for all your receipts if they audit you. Cons: depending on your situation, you could be missing out on itemized deductions that save you cash money.
- Itemized: Trying to pick up all the deductions you can. You get ‘em for a wide range of things like giving to charity, large medical expenses, or having to pay mortgage or real estate taxes on your home. If you do the math, and the itemized deductions are more than the standard deduction, you could end up saving a lot of dolla bills.
A little bit of both: Some things, like student loan interest and educator expenses (like school supplies if you’re a teacher), are deductible up to a certain amount, even if you don’t go the itemized route. With the new tax code, you can no longer deduct moving expenses unless you’re moving in connection with your service in the armed forces.
How do I decide what to do?
One word: receipts. Throughout the year, you should keep track of all expenses that could be an itemized tax deduction. Think:
Medical expenses…you finally got that root canal you’ve been putting off, or maybe you had to have a major surgery. If you weren’t reimbursed by your insurance, you can deduct certain medical expenses that exceed 7.5% of your adjusted gross income. Ex: If you make $100,000/year, your deductible unreimbursed medical expenses are those above $7,500. If they add up to anything below that threshold, you can’t itemize your medical expenses.
Charitable donations...you do-gooder, you. You can write off charitable donations you’ve made (cash, art, furniture, real estate...) if the total doesn’t exceed 50% of your adjusted gross income.
State and local taxes…Like state and local income or sales taxes, real estate taxes, and personal property taxes. You can add them all up and write them off your tax bill, but only if the total is less than $10,000.
If all of your relevant expenses add up to more than the standard deduction you'd take, then you should go the itemized route. If your head is spinning, H&R Block can help.
Taxes can be hard on your wallet. But deductions help lower your tax liability so that you don’t owe as much to the Feds.