Tax time: Should you itemize deductions?
As you prepare your tax return, you may wonder: Should I itemize deductions? Generally, you’ll want to itemize if it will allow you to deduct more expenses than the standard deduction—which is a fixed amount generally based on your filing status. Below are a few questions to get you started. Keep in mind, there are a lot of deductions out there, so check with a tax accountant or head to the IRS website if you think you may qualify for more.
Did you pay mortgage interest and property taxes on your home?
Generally, if the mortgage on your main or second home is under $750,000,1 the interest you pay is tax-deductible. You may also be able to deduct the interest you pay on home equity lines of credit used to improve the home that secures the loan. Property and real estate taxes may also be deductible up to a certain amount.
Caution: Deductibility depends on the use of the funds and should be determined by a tax advisor. Property taxes on rental or business properties cannot be deducted by itemizing, though they may be deductible as business expenses.
Did you pay significant out-of-pocket medical expenses?
If you have medical expenses that exceed 7.5 percent of your adjusted gross income for 2018 (the threshold rises to 10 percent for 2019), you may be able to deduct them. Qualified expenses include preventive care, surgery, dental work, vision care, prescription medications, hearing aids and more.
Caution: You cannot deduct expenses that were reimbursed by your insurance company or employer. You also cannot deduct anything paid for using a Flexible Spending Account (FSA) or Health Savings Account (HSA), because that money is already untaxed.
Did you make contributions to a qualified charity?
Gifts and donations to IRS-approved nonprofit groups are tax-deductible. The IRS counts everything from cash gifts, cars and household items to stocks and real estate as acceptable donations. In order to have your contribution recognized by the IRS, be sure to keep receipts, bank records or written communications that contain the name of the organization as well as the date and amount of the contribution.
Caution: Make sure the organization you are donating to is considered a tax-exempt charitable organization by the IRS.
Did you work from home?
If you’re self-employed, or fit a few other narrow conditions set by the IRS, you may qualify for tax benefits such as a home office deduction if you worked from home. Generally, the deduction amount is based on the size of the workspace.
Caution: The definition of home office is very narrow, and rules around claiming the deduction are very strict. For example, the area where you do business must be used exclusively for work-related activity.2
- If your filing status is married filing separately, this level is $375,000. Mortgages on homes purchased on or before April 1, 2018, may have a different limitation amount.
- Exceptions to this rule include using your home office as a day care or using it to house inventory.