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When Should I Itemize Tax Deductions?

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The standard deduction is the simplest way to do your taxes, but sometimes itemizing will save more money. Learn how to start calculating and which route to choose.

Key takeaways:

  • Itemizing deductions means you will list all eligible expense deductions on your tax return instead of claiming the standard.
  • Most Americans claim the standard deduction since it almost doubled from the Tax Cuts and Jobs Act in 2017.
  • If your itemized deductions are more than the standard deduction, consider itemizing.
  • Getting help from a tax professional will help you determine the best course of action.

When tax season rolls around each year, it’s easy to put off making your calculations, examining your records, and gathering your income-reporting forms. It can be especially challenging for self-employed individuals or business owners.

A big concern for many taxpayers is whether to itemize deductions on their tax returns versus taking the standard deduction. Of course, you always want to be sure that you minimize your tax burden in any way possible, so it’s no minor consideration. You may decide to itemize if you have a lot of eligible expense deductions, but most Americans claim the standard deduction. This is especially true ever since tax law revisions in 2017 nearly doubled the standard deduction.

Let’s walk through what it means to itemize, how to figure out expenses, and when you should go that route instead of the standard tax break.

What does it mean to itemize deductions?

Itemizing deductions on a tax return means you will list all deductible expenses from the applicable tax year, including charitable donations, out-of-pocket medical expenses, some mortgage expenses, investment interest, tax preparation costs, disaster losses, and others. 

These deductions are subtracted from your adjusted gross income (AGI), potentially lowering your annual tax bill significantly.

Most taxpayers claim the standard deduction—often, it doesn’t make sense to itemize to maximize tax savings. And the standard tax break is a lot easier, given you don’t have to list expenses line-by-line.

How to figure out your deductions

To understand what kind of deductions you’re working with, you’ll need to keep track of your expenses throughout the year. Make sure you have a system in place to maintain accurate, complete records, so you’re not scrambling when it’s tax time.

If you want to calculate your deductions, there are several numbers to keep track of, including:

  • Mortgage interest paid: A lender will send you Form 1098, Mortgage Interest Statement, to report what you paid in interest.
  • State and local taxes: If you pay state and local income tax, sales tax, personal property tax, or real estate tax, you can add these up to a maximum of $10,000 in deductions.
  • Charitable donations: Keep receipts and records of all contributions you made to nonprofits during the year.
  • Out-of-pocket medical expenses: You can only deduct out-of-pocket medical expenses that are over 7.5% of your AGI. Eligible expenses include fees for doctor and dentist visits, glasses and contacts, medical supplies, prescriptions, and many others. Just make sure it’s worth tracking all these expenses by first multiplying your AGI by .075 and thinking through whether you are realistically over that amount.
  • Costs of property damage: If you reside in an area that is a federally declared disaster area, any damage to your property may qualify for a deduction.
  • Miscellaneous deductions: There are a host of other expenses that are possible deductions, including gambling losses, amortizable bond premiums, theft losses from income properties, and penalties paid as restitution or remediation, among others.

If you plan to itemize your deductions next tax season, be sure to keep tabs on all these expenses and others you may be eligible for. Because taxpayers have to list the amounts of each on a tax return, it’s not enough to just have the overall total.

When you should itemize

It makes sense for some taxpayers to itemize, even though most people claim the standard deduction. The standard deductions for the 2020 tax year were as follows:

  • Single taxpayers: $12,400
  • Married joint filers: $24,800
  • Heads of household: $18,650

If you are over age 65 and/or are blind, you can increase the standard deduction, sometimes by more than $5,000. The standard deduction is relatively high now, nearly doubling in 2017 after the Tax Cuts and Jobs Act.

To determine if you should itemize or claim the standard deduction, calculate all the expenses above that you can deduct. At a minimum, ballpark them. If the expense total is greater than the standard deduction for a given taxpayer status, itemizing will get you a bigger deduction and reduce your tax bill even more. If it is less, then the standard deduction is your best bet.

Sometimes, if taxpayers expect to have a similar itemized total to their standard deduction, they’ll go with the standard just to save themselves all the work of keeping receipts and ensuring everything they report is accurate. The IRS may be more likely to audit tax returns with numerous itemized deductions, so it’s crucial to keep excellent records.

Getting help from a tax professional

Tax laws are not the easiest things to understand, and they frequently change as political administrations come and go. When you’re not sure whether you should itemize or take the standard deduction, or you don’t know which of your expenses are deductible, a tax professional can help. 

Talk to the team at Provident CPA and Business Advisors to get all of your tax questions answered. We are experienced in best practices and well-versed in current rules—and will help you pay the least amount of tax legally possible.

What Businesses Should Know About Charitable Contributions

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In a perfect world, all charitable donations by businesses would be tax deductible. Unfortunately, there are caveats that entrepreneurs must know

It seems like tax law is always changing. As an entrepreneur, you’re tasked with keeping up so that your business follows all regulations while making sure you understand all of the tax breaks available to you.

The treatment of charitable contributions is an area of tax law that can be particularly complex and hard to understand. While tax benefits aren’t always reasons to start giving to charity, deductions have existed for many years for some charitable contributions.

What are the caveats, and what contributions are deductible? Here’s an overview of what the IRS has to say, as well as recent changes implemented in 2019.

Itemizing to deduct

Perhaps the first thing you should know is that charitable donation deductions are only applicable if you decide to itemize your deductions on your tax return. Many taxpayers take the standard deduction, as it’s often higher than a potential itemized deduction. However, charitable contributions can only be deducted if the taxpayer decides to itemize instead of taking that standard deduction (a figure which was raised by the Tax Cuts and Jobs Act).

If you’re itemizing and made charitable contributions, you can deduct up to 50 percent of your adjusted gross income (AGI)—but in some cases, limitations apply to the tune of 20 and 30 percent. If property is donated, the full fair market value may be deducted, thought adjustments may apply if the property’s value has appreciated.

Types of applicable donations

Qualifying contributions by either corporations or individuals can be cash, financial assets, or property, such as real estate.

The IRS lists the following types of organizations as qualifiable to be considered charitable contributions:

  • A donation made for public purposes to the U.S., a state, or U.S. possession or political subdivision thereof
  • An organization (community chest, corporation, trust, fund, or foundation) that operates exclusively for charitable, religious, educational, scientific, or literary purposes, prevents cruelty to children or animals, and is organized or created in the U.S.
  • A religious organization such as a church or synagogue
  • An organization for war veterans
  • A nonprofit volunteer fire company
  • A federal, state, or local civil defense organization
  • A domestic fraternal society, if the contribution is used only for charitable purposes
  • A nonprofit cemetery company, if the contribution is used for the care of the cemetery as a whole

These contributions have to be made before the end of the tax year.

New 2019 regulations

Earlier this year, the IRS and the U.S. Department of Treasury issued final regulations that impact charitable contributions. Taxpayers must now lower their deductions by the amount of state or local tax credits they get or expect to get in return. Taxpayers must also treat their payments in exchange for these credits as state or local tax payments.

The IRS is also offering a safe harbor to allow a taxpayer who itemizes their deductions to treat payments that are charitable contribution deductions as state or local taxes for the purposes of federal income tax on their tax return.

These final regulations went into effect on August 12, 2019, and apply to applicable contributions made following August 27, 2018.

Business expense for C corporations

The above guidelines apply to individuals and if you run a small business that is a pass-through entity (a qualifying sole proprietorship, partnership, LLC, or S corporation). If your business is a C corporation, meaning it is not a pass-through entity, it is considered separate from the business owner come tax time. Income is thus taxed at the corporate level as well, creating a potential double-taxation situation.

But one benefit of this business structure is that C corporations can actually write off charitable contributions as business expenses. And donations that are above the limit can be carried over into subsequent tax years.

Making charitable contributions is a worthy move. And while tax benefits may not always apply—especially if it’s more worth it to you to take that standard deduction—you could end up seeing benefits if you decide to itemize and have made the qualifying donations under tax law.

It’s always important to stay up to date with the latest tax changes. At Provident CPA & Business Advisors, we work with entrepreneurs like you, helping you pay the least amount of tax legally possible. We can help you understand the ins and outs of regulations and which approach will get you the most benefit when April rolls around.

Contact the team at Provident today to learn more about our tax and business services.

How the 2018 Tax Cuts and Jobs Act May Impact Your 2020

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Even though it began in 2018, the TCJA’s effects are only now in full swing. How will it impact you in the next year?

Changes in the Tax Cuts and Jobs Act (TCJA), which first went into effect in 2018, have really only been felt now that we’re well into 2019, and 2018 taxes have been filed. You may be aware of some of the bigger changes, like adjusted income tax brackets, but the TCJA actually brought updates to quite a few areas. And some changes didn’t go into effect until 2019 and will thus be new for 2020 tax filing.

As the U.S. Department of Treasury website indicates, the TCJA is the “most comprehensive tax legislation passed in more than 30 years.” While you may not feel the impact of each and every change, it’s important to be aware of how updates could affect you moving forward.

Here is a guide to some of the ways the 2018 TCJA may impact your 2020.

An overview of select changes

Income tax brackets: The TCJA made changes to the income-tax brackets, mostly lowering the rates—for instance, the tax rate for a single taxpayer with a salary of $50,000 went from 25 percent in 2017 to 22 percent in 2018. The last bracket was changed from a 39.6 percent tax rate for income over $418,400 in 2017 to a 37 percent rate for income over $500,000 in 2018. The bracket for income between $0 and just over $9,000 remained at 10 percent.

Health insurance: The Affordable Care Act (ACA) is still in effect, but the TCJA removed the requirement to have health insurance coverage. This means that there’s no longer a penalty for those that don’t have it. This is pretty significant for many people, since the penalty had been almost $700.

Estate tax: The federal estate tax will be $11.4 million for single filers and $22.8 million for married couple beginning in 2019, meaning that the tax will impact even fewer people than it did before.

Standard deduction: In 2017, the standard deduction was $6,350 for single filers, and that almost doubled under the TCJA to $12,000 in 2018.

College savings: Under the TCJA, parents can distribute up to $10,000 per year, per student, from a 529 savings account (college) for tuition and other expenses.

Child tax credit: Another increase came to the child tax credit, which is now doubled to $2,000 per child. Because this credit only applies to children under 17, another $500 credit has been created for dependents who are over 17.

Personal exemption: The personal exemption, which allowed you to deduct a certain amount for each eligible member of your household, is no longer an option. In 2017, this amount was $4,050 for yourself, in addition to $4,050 for your spouse and each of your children or dependents. This was expected to increase to $4,150 in 2018, but it’s now $0 because of the TCJA.

The TCJA for businesses

Deduction changes: The TCJA added a new deduction, the qualified business income (QBI) deduction, that gives certain businesses a 20 percent deduction if they are an S corporation, partnership, sole proprietorship, or sometimes, a trust or estate.

The deduction for expenses that relate to activities including entertainment, amusement, or recreation was eliminated. But the IRS says that taxpayers may still deduct 50 percent of business meals if the items aren’t considered “lavish or extravagant.”

Another significant deduction change is a limitation on the business interest deduction for some businesses. Those with less than $25 million in average annual gross receipts have an interest expense limit of business interest income plus 30 percent of the adjusted taxable income and floor-plan financing interest.

Changes for businesses with employees: Some changes only apply specifically to businesses that have employees. One such change is that employers can now deduct reimbursements for bicycle commuting as a business expense, and employers have to include 100 percent of these reimbursements in the applicable employee’s wages. Moving-expense reimbursements must also be included in employee wages.

The TCJA also introduced a tax credit for employers who give paid family and medical leave to employees. However, this credit only applies after December 31, 2017, and before January 1, 2020.

Looking into 2020

So how will the TCJA changes impact your tax experience in 2020, when you file your 2019 taxes?

  • Be aware that income tax brackets have increased a bit again in 2019 due to inflation.
  • The elimination of the personal exemption, while seemingly a big loss, was meant to be counteracted by an increase in the standard deduction and child tax credit.
  • The standard deduction got another increase: up to $12,200 for single taxpayers and $24,400 for married couples.
  • If you don’t have health insurance, you will no longer receive a penalty because of the TCJA. This didn’t go into effect until 2019.

Remember that all of the changes brought by the TCJA aren’t permanent—many are set to expire on December 31, 2025, and lots could change in the political environment before then.

If you have any questions about tax reform and how it will impact you, get in touch with the professionals at Provident CPA & Business Advisors.