| Written by Brett Porter, EA for Winter 2020 Edition of OurSeniors.net Magazine |
Every year you hear it. You may even say it yourself. “I can just write it off on my taxes,” but can you really? Most people are completely confused as to whether or not all their tax deductions are even making a difference. Why is this?
Most people find their tax return to be a huge burden—they do not want to think about it throughout the year, they do not want to do it come April, and they most certainly do not want to review what all those numbers are on their 1040. They just want to hand in their information to their accountant and be done with it.
Do you know if you itemized last year? A lot of people do not even know that there are two options—itemizing or the standard deduction, or what these options mean. They just hear throughout their life that certain items are deductible and assume that those items are going to affect their tax return.
So let’s go over what these two options are. We’ll start with the standard deduction. Every year, the government comes out with the standard deduction. This amount varies based on your filing status. For single filers – $12,200, for head of household – $18,350, for married filing jointly – $24,400, and $12,200 for married filing separately. This amount increases $1,100 per person for those over 65 years old. This amount gets deducted from your adjusted gross income (AGI), and barring any other credits, gives you your taxable income.
For example, you’re a single schoolteacher with an AGI of $40,000. Assuming you take the standard deduction, your taxable income would be $27,800 ($40,000-$12,200 standard deduction). That’s how the standard deduction works.
Itemizing can be a little more confusing. But in general, if your itemized deductions amount to more than your standard deduction, you should itemize. What are itemized deductions? Some of the more common itemized deductions are unreimbursed medical expenses, mortgage interest, real estate taxes, and charitable contributions. Let’s look at these a little closer.
So, you had a rough year health wise and racked up thousands of dollars in medical expenses, but at least it will help lower your taxes this year, right? Not so fast. Medical expenses are subject to what is known as a 10% floor. What this means is that none of your medical expenses count towards your itemized deductions until they are greater than 10% of your AGI. Let’s say you needed a hip replacement this year. Your insurance isn’t great, so the replacement cost you $6,500 out of pocket. You have a healthy retirement income and an AGI of $70,000. Guess how much is deductible on your tax return? Zero! Absolutely none of it. Pretty terrible, huh? For any of your medical expenses to count towards your itemized deductions, you would need $7,001 ($70,000 x 10% = $7,000) in medical expenses. Even then, it may not help you if you do not have enough other itemized deductions to put you over your standard deduction.
What’s included as a medical expense? First, it must be unreimbursed! If you pay for it, then your insurance company pays you back, it does not count. Common medical deductions include insurance premiums, doctor co-pays, prescription medicine, long-term care, and hospital stays. Some of the more uncommon deductions are miles driven for medical reasons, medical equipment (CPAP, crutches, wheelchair, adjustable bed (if needed for medical reasons), improvements made to your house to the extent they do not increase the value of your house (wheelchair ramps, chair lifts, shower seats, etc.), bandages, knee/elbow/wrist braces, contact lenses, contact solution, contact cases, and glasses. It is important to note that for some reason, over the counter medicines are NOT deductible.
The mortgage interest deduction is a bit simpler to understand. You can deduct the interest paid during the current year on a mortgage for your main home and a second home that’s not a rental. If your mortgages total more than $750,000, you can only deduct the interest on the first $750,000. If you have three homes, you can pick two of the mortgages to take the deduction for. Also, mortgage insurance premiums are deductible here too!
Real estate taxes are simpler yet. If you pay real estate taxes during the tax year, you can deduct them. You can also deduct state income taxes paid and sales tax on large purchases like cars, trucks, RVs, and boats.
Charitable contributions are those gifts to companies that are IRS-registered charities. These can include churches, hospitals, schools, veteran’s organizations, etc. These contributions can be cash or non-cash. Your cash contributions cannot exceed 50% of your AGI for most charities. For veteran’s organizations and non-cash donations, they cannot exceed more than 30% of your AGI. If your donation is greater than $250, you need a receipt from the organization. Payments made to an individual are NEVER deductible! So, if you give $1,000 to help a single mom out with school? You’re an awesome person, but it is no help to you on your taxes. Miles driven for charitable purposes are also deductible.
So after all is said and done, if all these itemized deductions are greater than your standard deduction, congratulations! You can itemize! If not, you can leave your box of receipts at home when it’s time for your tax appointment!