NEW YORK — When tackling your taxes, it can sometimes be difficult to figure out whether you should take a standard deduction or itemize.
According to tax professionals, itemizing generally only makes sense if your itemized deductions add up to more than the current standard deduction of $13,850 for a single filer and $27,700 for a married couple.
Here’s what you need to know:
For the vast majority of tax returns, the standard deduction is the right choice.
“In general, taxpayers whose total itemized deductions are less than the standard deduction (based on their filing status) will benefit from taking the standard deduction. However, if the taxpayer’s total itemized deductions are greater than the standard deduction, they must itemize,” said Kathy Pickering, chief tax officer at H.&R block.
However, there are a few exceptions, and there are some things you should consider specifying that people sometimes forget.
“One situation where it may be useful to itemize this is when the taxpayer is claimed as dependent on another taxpayer’s return, and his standard deduction is limited,” Pickering says.
Deductions may include amounts paid for eligible state and local income taxes, real estate taxes, property taxes, mortgage interest, disaster losses, charitable donations, and a portion of medical and dental expenses.
According to Tom O’Saben, director of tax content and government relations at the National Association of Tax Professionals, the three biggest potential deductions for most people are mortgage interest, charitable donations of cash or real estate (these require a separate form to be filled out). anything over $500, and anything over $5,000 requires an appraisal), and eligible state and local taxes (known as SALT), which are now capped at $10,000 for most people.
“For a small business owner, almost all tax-deductible business expenses come out of their checkbook. Capturing it is the easy part. But there are a few things it’s easy to miss,” says Keith Hall, CEO of the National Association for the Self-Employed (and CPA himself).
Car use for small businesses is one thing. Keep a logbook in your car. When you visit a customer or go to the post office or store, record those miles. They add up. For 2023, 65.5 cents per mile will be allowed as a deduction.
The home office deduction is also easy to miss. If you have a dedicated home office for your business, $5 per square foot can be deducted.
Pension fund contributions can also be deducted, Hall says. Those contributions save taxpayers money today. A simplified employee retirement fund is something that many small business owners have.
“The SEP is as easy to open as opening a bank account and they can deposit up to 20 percent of their profits into that account, and it is tax deductible,” says Hall.
Pickering points out that there are two types of deductions to take into account; above the line and below the line.
“Above the line deductions can be claimed without having to itemize your deductions and can still be claimed if you also claim the standard deduction. Bottom line deductions can only be claimed if the taxpayer items the deductions,” Pickering explains.
A common above-the-line deduction is interest paid on student loans. This can be done even if the standard deduction is taken instead of itemized deductions.
O’Saben says other additional deductions to consider include $300 per tax filer ($600 if a married couple who are both teachers) for primary and secondary school teachers for unreimbursed expenses used in the classroom , such as disinfectant wipes and protective masks. And members of the military who travel should also remember to take deductions for unreimbursed expenses, he says.
On the other hand, deducting the qualified interest a homeowner pays on their mortgage is a below-the-line deduction, available only to those who elect itemized deductions once they take the standard deduction amount.
Other deductions to consider include medical expenses, although these must be more than 7.5 percent of gross income to qualify, O’Saben says.
“In most cases, the list of deductions cannot include health insurance premiums as these were usually deducted from their paychecks before taxes. It also cannot include over-the-counter supplements or electives such as plastic surgery. Moreover, these costs must be paid in full,” he says.
“I have been doing tax for over 33 years and I always tell my clients that it is the reality of what you spent money on that will determine this.”
Sometimes it makes sense to check with your state about state-specific deductions, O’Saben says.
“I’m in Illinois, where they allow an instructional materials credit for K-12 teachers of up to $500. That’s a $500 tax cut,” he says.
Unlike deductions, which lower your taxable income, credits lower your final tax bill.
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Find more information about AP’s tax season coverage here: https://apnews.com/hub/personal-finance