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One of the first things people ask me when they hear I am an accountant is "Can I write ___ off?". As with most areas of tax code and accounting, the answer is often more complex than the average person is actually interested in learning. In this blog, I'm going to focus on personal tax deductions or Schedule A itemized deductions. Next week we'll dig deeper into small business deductions!
New this year, the standard deduction for single or married filing separate was doubled to $12,000 and married to $24,000. I think most people know this information by now. So now the next question is, "what do I have to do to itemize?"
Medical Expense Write-Off:
Whether or not you can write off medical expenses depends on a lot of factors. The first of which being, did your medical expenses total MORE THAN 7.5% of your adjusted gross income. For most people, this stipulation knocks them out of contention almost immediately. For an example, for an average person making $50,000/year you'd have to have $3,750 in medical expenses, and even THEN it's only the amount OVER $3,750 that can be included in your itemized deductions. That means for this example, if you had $3,850 in medical expenses for the year, you could add $100 to your itemized deductions. You'll also note that I said ADD this amount to your itemized deductions. If you don't reach the amount necessary to itemize in total deductions ($12,000/$24,000) medical deductions will make no difference regardless.
State & Local Taxes Write-Off:
State & Local taxes paid can be itemized up to $10,000 or $5,000 if single (previously was unlimited). This new stipulation of up to $10,000 is definitely impacting how many Americans can itemize this year. State and local taxes include: state taxes paid, local taxes paid (STL City for example), real estate taxes paid, and personal property taxes paid. Now, if you have relatively high income and high real estate taxes you will likely be capped on this section of itemized deductions.
Mortgage Interest Paid:
Mortgage interest is pretty self-explanatory. You receive a 1098 mortgage interest statement and the interest on that statement is an itemized deduction. Again, assuming you have enough in itemized deductions to exceed the standard deduction. Certain taxpayers can also get a small amount of itemized deduction for mortgage insurance as well.
Charitable contributions are included in itemized deductions as well. When you make a cash donation, you should receive a receipt for the amount of the deduction. Things like golf tournaments and dinners will include on that receipt the portion that was deductible (you can't deduct the $200 you paid for the golf tournament, because $100 was for playing golf so only $100 is deductible.) Additionally, there are deductions for clothing, furniture, etc. When you make a non-cash donation it is important to get a receipt and accurately report the items donated and amount you could receive for an item if sold at a thrift shop. (For example, that $10 shirt you got from Old Navy 15 years ago doesn't count for a $50 charitable donation deduction) These types of deductions can be a little hairy as a lot is left up to interpretation so it is best to err on the side of caution.
Assuming you made it this far, the most important thing to remember is that all of the above items have to equal MORE THAN your standard deduction for your filing status to see any benefit from these deductions. Prior to 2018 tax year I would say roughly 50% of my clients benefited from itemized deductions. With the new tax law, I have yet to have one client reach enough in itemized deductions to surpass the standard deduction. A lot of people get tricked, for lack of a better word, by Turbo Tax into thinking they are seeing a benefit from their $100 donation to the charity of their choice because Turbo Tax has their clients enter all of this information with no explanation of how it works. If you're interested in having a better understanding of your taxes, please set up an appointment with me today!