Navigating Standard vs. Itemized Deductions: A Thoughtful Consideration
As we approach tax season, it's understandable that the process can become a source of stress! The routine of preparing and filing taxes often involves opting for the standard deduction, providing a convenient solution.
However, life changes prompt us to reevaluate our financial strategies, and it might be the opportune moment to contemplate the shift away from opting for the standard deduction and towards itemizing your deductions.
Every taxpayer is entitled to a standard deduction on their tax returns, determined by their filing and dependent status. This figure is adjusted annually for inflation, and for the tax year 2023, stands at:
$13,850 for single and married filing separately filers
$20,800 for head of household filers
$27,700 for married filing jointly filers
While the standard deduction serves as a straightforward approach, taxpayers also have the alternative option of itemizing deductions, potentially resulting in a larger deduction. However, it's crucial to note that this is generally more advantageous for those with higher incomes.
To embark on itemizing deductions, taxpayers need to diligently track their deductible expenses, maintain supporting documentation, and assess whether their itemized deductions surpass the standard deduction for their respective filing status. Although it may seem meticulous, the time and effort invested in this process can yield monetary benefits.
Categories available for itemized deductions encompass:
State and Local Taxes – Limited to $10,000
Real Estate Taxes: Review property tax bills or canceled checks, considering those paid through an escrow account.
State and Local Income Taxes:Review the total state and local income taxes on your W-2 and any estimated tax payments made to your state or local government for this year’s return.
Sales Tax: Compare your state and local sales tax to your state and local income taxes. You can either deduct actual sales tax paid on all of your purchases throughout the year (which will require documentation), or you can opt to deduct an estimate of what taxes you paid to your local sales based on your income level. You can add to this estimate any sales tax you paid on big-ticket items, such as a new vehicle, boat, RV, or major home renovation.
Personal Property Taxes: Review if a portion of your of annual car registration can be deducted based on your vehicle's value. You can usually find this on your registration or renewal notice.
Medical Expenses
Deductible medical expenses include various costs, such as doctor and dentist fees, lab fees, prescription medications, and health insurance premiums. Please note, you can only deduct medical costs that exceed 7.5% of your adjusted gross income (AGI), located on line 8b of Form 1040. It is recommended that you determine your AGI and multiply that by 7.5% to determine if your out-of-pocket medical costs will exceed this amount.
Mortgage Interest Expense
Compare the total mortgage interest paid, including mortgage insurance premiums, mortgage points, and real estate taxes, to the standard deduction. You can find this information on Form 1098, also known as your Mortgage Interest Statement, provided to you by your mortgage lender.
Charitable Contributions
Total the amount donated to non-profit organizations, including religious organizations. Any items donated, such as clothing, furniture, or other household items can be deducted as well, but in order to do so you will need to determine their estimated value and keep a record of what was donated and when. There are a number of online tools available to help with this estimate. Contributions totaling over $250 require written documentation from the charity, and contributions totaling less than $250 will require less documentation, such as a credit card statement or receipt from the charity.
If the cumulative total of these categories surpasses the standard deduction, exploring itemized deductions could prove financially beneficial.
At EHTC, we dedicate ourselves year-round to staying abreast of industry standards through continuous education and internal discussions. This commitment ensures that we deliver optimal services to our clients.
Should you have any questions or require support, feel free to reach out to your designated EHTC Accounting, Advisory, or Tax Services team.
If you're considering EHTC as your tax partner, contact us today! We're here to assist you in making informed decisions during this tax season.