Every year you have two options: taking the standard deduction or itemizing your deductions. Let's look at what each of these options means for you.
What does 'standard deduction' mean?
To take an amount determined by the government off your total adjusted gross income (AGI) with no listing or proof necessary, everyone is eligible.
What does 'itemizing your deductions' mean?
To go through item by item, and list purchases/donations/ etc. that the IRS will allow you to remove from your total AGI to pay less taxes (it must add up to $1 over what the standard amount is for that year).
Who would want to itemize?
Someone who has receipts or evidence and thinks they have spent/donated enough to get more than the government already gives you as a standard deduction.
Why are there deductions?
As a means to lower your adjusted gross income and taxable income, the IRS allows taxpayers to choose between itemizing deductions or taking the standard deduction. You may choose whichever method you want, but only one is more tax advantageous than the other. In rare circumstances you must choose to itemize.
Who decides the amount of the standard deduction?
The standard deduction is an amount set by the government every year and is dependent on your filing status. There is no other information to enter if you want to take the standard deduction beyond your filing status. You have the option however, to itemize your deductions and FreeTaxUSA software will help you choose which is best for you.
How does itemizing my deductions work?
Itemized deductions are a combination of many different expenses and/or donations you have made throughout the year and can easily add up to more than the standard deduction. However, in order for itemized deductions to be of use to you on your tax return, the total needs to add up to at least $1 more than your standard deduction.
What can I deduct if I itemize?
The list of what you can itemize for deductions is very long and can be found in part, by looking at Schedule A, Itemized Deductions. General categories of itemized deductions include:
- out of pocket medical and dental expenses (subject to a 7.5% limitation of AGI);
- taxes paid, such as state tax and property or real estate tax;
- interest paid, such as mortgage interest on first and second homes;
- gifts to charity, including cash, checks and donated items like clothes and household furnishings to Goodwill or any 501©3 non-profit;
- casualty and theft losses from floods, fire, vandalism, etc., (under limited circumstances);
- and a catch-all category called other itemized deductions such as gambling losses (up to the amount won).
There are many other types of itemized deductions. You can find an IRS Publications for each of the different categories above to see the full list of what is considered an itemized deduction, such as IRS Publication 502 for Medical and Dental Expenses.
A rare circumstance where you must itemize is if you are married filing separate and your spouse chooses to itemize, you must do so also.
