When it comes to taxes, it’s much easier to take the standard deduction and get your return done quickly. But sometimes a little extra effort to itemize deductions could be worth it to lower your tax bill or boost your refund.
Deductions reduce the amount of your taxable income. So generally, the more you have, the lower your taxes.
A standard deduction reduces your taxable income by a set amount, depending on your income, age, filing status and other factors, whereas with itemized deductions, you can pick and choose from among hundreds if you qualify.
In the tax year 2020, 87.3% of Americans took the standard deduction, just shy of the 87.6% who did in 2019, IRS data show. It’s unknown how many of those people could have fared better itemizing their deductions, but it is likely “some of those who took the easy way out probably shortchanged themselves,” according to Intuit TurboTax.
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When should you itemize?
The IRS says you should itemize deductions if their total tops your standard deduction, or if you must itemize deductions because you can’t use the standard deduction.
Hints as to whether you may benefit from itemizing, without doing detailed calculations, could lie in whether you owned a home, had significant medical expenses or made sizable donations.
- If you owned a home and your mortgage interest, points, and mortgage insurance premiums exceed your standard deduction, there’s a good chance you would benefit from itemizing, Intuit TurboTax said. If you have a $300,000 mortgage at 4% interest, that’s already $12,000 of interest you can deduct.
- Unreimbursed, qualified medical expenses that exceed 7.5% of your adjusted gross income can be deductible if you itemize. For example, if your adjusted gross income is $50,000, expenses above $3,750 for the year are deductible. If your bills totaled $10,000, you could deduct $6,250 of qualified medical expenses, which include abortion, ambulances, contact lenses, chiropractor, crutches, eye exams, glasses, prescription drugs, hearing aids, home care, fertility treatments, lab fees, and long-term care.
- Charitable contributions can only be deducted if they’re itemized. If you made many donations throughout the year, they could add up to thousands of dollars, making itemizing more beneficial.
Once I’ve decided to itemize, what can I deduct or take a credit for?
Some of the most overlooked itemized items include:
- State and local sales tax: you can deduct either state and local income taxes or up to $10,000 ($5,000 if married filing separately) in state and local sales tax, whichever is larger. Usually, income tax is larger but in states without income tax, the decision is easier. You can either add up sales tax from your receipts for the year or use the IRS calculator to figure out what you can deduct.
- Child and dependent care credit: if you pay for someone to watch your kid 12 years and under, or a spouse or another dependent so you can work, you may be eligible for a credit of up to $3,000 for one person, or $6,000 for two or more people.
Note: Credits are more valuable than a deduction for lowering your tax bill because they are a dollar-for-dollar reduction in your bill. For example, a $1,000 credit cuts your bill by $1,000. A $1,000 deduction reduces your taxable income and may result in savings of a couple of hundred dollars.
- Other Dependent Credit: a credit of up to $500 for any-aged dependents who don’t qualify for the child tax credit.
- Gambling losses: If you keep a record of your winnings and losses, you can deduct your losses as long as they’re not more than your winnings. Losses and winnings can come from activities such as lottery tickets, slot machines, and racing events.
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Are there deductions I can take if I take the standard deduction?
Yes. Even if you don’t itemize, some overlooked deductions you can take include:
- Earned income tax credit: About 20% of Americans qualify but miss taking this credit, which on average returned $2,043 per claimant. If you earned $53,057 ($59,187 married filing jointly), you may be eligible whether you have children or not. If you don’t owe any tax, you can get it refunded to you.
- Child tax credit: if you have a dependent under 17 years old and earn less than $200,000 ($400,000 if filing a joint return), you may qualify for a $2,000 credit per child. The credit begins to phase out above those income limits.
- Student loan interest: the lesser of the interest you paid during the year on a student loan or $2,500 is deductible and is phased out as your income grows. You can’t claim any deduction if your modified adjusted gross income is $85,000 or more ($175,000 or more if you file a joint return).
- American opportunity tax credit: A maximum annual credit of $2,500 per eligible student for the first four years of higher education. If the credit brings the amount of tax you owe to zero, you can have 40% of any remaining amount of the credit (up to $1,000) refunded to you. To claim the full credit, your modified adjusted gross income must be $80,000 or less ($160,000 or less for married filing jointly). It phases out after those income thresholds and is gone after over $90,000 ($180,000 for joint filers).
- Alimony: You can deduct from your income alimony payments if your divorce was finalized before 2018 and is unmodified.
- Jury duty pay: if your employer took your jury duty pay because it continued to pay you while you served, you can deduct the jury duty amount as an adjustment to your income.
- Time deposit penalties: Any fees you had to pay for early withdrawal from a time deposit account, like a certificate of deposit, are deductible.
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Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
Story Credit: usatoday.com