To Itemize Deductions or not to Itemize Deductions - That is the Question

It’s everyone’s favorite time of year…tax season! In the intricate world of tax planning, knowing the right moves can make all the difference. Today, we’re diving into itemized deductions found on Schedule A of your 1040. Itemized deductions allow you to subtract eligible expenses from your adjusted gross income, potentially lowering your taxable income and, in turn, your tax liability (how much you owe the IRS).

Before the Tax Cuts and Jobs Act of 2017 (TCJA), we used to be able to deduct all kinds of things and you really had to work and track expenses to optimize your tax savings. The Act simplified the tax code by getting rid of a lot of the eligible deductions and by making standard deductions so high, that most people won’t need to itemize. While the standard deduction provides a straightforward option, exploring itemized deductions can unearth additional savings for those willing to put in a bit of extra effort. Here are a few of the most popular deductions:

1. Medical Expenses: Your health is your wealth, and the IRS acknowledges that. Medical expenses exceeding 7.5% of your adjusted gross income (AGI) can be deducted. This includes a wide range of costs, from doctor visits and prescription medications to dental treatments and even certain long-term care expenses.

• Pro Tip: Keep meticulous records of medical expenses throughout the year, including receipts and invoices. You never know when they might come in handy.

2. State and Local Taxes: The TCJA capped the deduction for state and local taxes at $10,000, but this deduction is still a valuable component of Schedule A. It encompasses property taxes, state income taxes, and even foreign property taxes in some cases.

• Pro Tip: Consider prepaying your property taxes or making early state income tax payments to maximize your deduction in a given tax year.

3. Mortgage Interest: For many homeowners, mortgage interest is a substantial deduction. You can typically deduct interest on your mortgage loan, including mortgage insurance premiums and certain points paid at closing. However, recent changes in tax laws may affect the amount you can deduct, so stay informed about the latest updates.

• Pro Tip: Keep track of your Form 1098, Mortgage Interest Statement, provided by your lender. It outlines the mortgage interest and points paid, simplifying the documentation process.

4. Charitable Contributions: Giving back is not only a noble endeavor but can also be financially rewarding. Cash and non-cash donations to qualified charitable organizations can be deducted. Ensure you maintain proper documentation, including receipts and acknowledgment letters, for your contributions.

• Pro Tip: Consider donating appreciated securities instead of cash to potentially maximize your tax benefits while supporting your favorite causes.

Navigating the landscape of itemized deductions on Schedule A requires attention to detail and a strategic approach. By understanding the nuances of each deduction category and staying informed about changes in tax laws, you can position yourself to maximize your tax savings. Remember, every dollar saved through itemized deductions is a dollar you can allocate toward your financial goals.

Consult with a qualified tax professional to ensure you're optimizing your deductions based on your unique financial situation. Additionally, stay informed about updates in tax laws and consider incorporating tax planning into your overall financial strategy. Don't leave money on the table—empower yourself with knowledge and make the most of the opportunities available to you. And as always, please feel free to reach out to me if you have any questions – jennifer.jenkins@bluestonewp.com or if you would like information on tax planning, please check out my tax planning guide here. Happy tax planning!