As you complete your taxes, you have the option to itemize your deductions or take a standard deduction. It's important to carefully consider which option is best for your specific tax situation, because if you make the wrong choice, you may pay higher taxes than you needed to. Before you complete your taxes this year, consider the following information.
What Are Tax Deductions?
It's important to understand what tax deductions are and how they benefit you. Tax deductions are expenses that lower your taxable income, thereby reducing your tax liability or increasing your potential tax refund. There are two types of tax deductions available: standard and itemized.
A standard deduction reduces your taxable income by a fixed amount, which is set by the IRS. With this option, you don't have to keep receipts and other records.
You also don't need to itemize each specific expense, which may save you a significant amount of time and hassle. The 2017 standard deduction amounts are as follows:
Personal Exemption: $4,050
Single Filing Status: $6,350
Married Filing Separately: $6,350
Head of Household: $9,350
Married Filing Jointly: $12,700
When you itemize your deductions, you deduct the actual amount you spent on eligible goods or services that year from your taxable income. Many tax filers avoid this option because it's time-consuming and complicated. In addition, you need to include receipts and records that show proof of payment.
If you itemize deductions on your tax return, you need to know what expenses qualify, and you need to meticulously keep track of them. Remember, these deductions must all be personal – no business expenses. Some examples of qualifying expenses include:
Medical and dental expenses
Real estate and property taxes
State and local income taxes
Tax preparation fees
When you itemize a deduction, you must list your deductions on the Schedule A form, and you must have actual receipts, bills or invoices. However, even though you itemize the actual cost of these items, there are some limitations that vary by the type of expense. Further, there are additional limitations for individuals with higher incomes.
Which Option Should I Choose?
The option that is best for you depends on your individual circumstances. If you prefer not to save your receipts and itemize your expenses, or if you don't have expenses that are likely to exceed the standard deduction that applies to your situation, then the standard deduction may be best. However, you may benefit from itemizing your tax deductions if you:
- Made a large charitable donation
- Paid mortgage interest and real estate taxes
- Had large, uninsured medical and dental expenses
- Had an uninsured casualty (fire, flood) or theft loss
- Have large, unreimbursed miscellaneous expenses
If you're unsure which option is most advantageous, add up all of your allowable expenses and determine which is greater: the standard deduction based on your tax filing status or the sum total of your itemized deductions. If the combined itemized deductions are greater than the standard deduction amount, itemizing may be your best option, but do so only if you have the receipts and records to back it up in case you're audited. If you haven't kept these records, you'll want to take the standard deduction.
Take the time to examine your individual tax circumstances and determine whether itemizing your expenses or claiming the standard deduction is best for you. If you're not sure what you can itemize, a certified public accountant or tax professional can help you decide which option will save you the most money on your taxes.