Should I itemize this year?
The only sure way to determine which method saves the most tax dollars is to run the numbers. Use Schedule A to list all your deductible expenses and compare the total to the standard deduction for your filing status. If your actual itemized expenses exceed the standard deduction, you’ll save money by itemizing. Because of the American Taxpayer Relief Act, you may be subject to phase out limits should you choose to itemize.
How much is the standard deduction this year?
If you are single or married filing separately, your basic standard deduction for 2016 is $6,300; head of household – $9,300; or married filing jointly or qualifying widow or widower – $12,600. If you’re over age 65 at the end of the tax year or legally blind, you’re entitled to an additional standard deduction, depending on your filing status.
What expenses can I itemize?
Taxpayers can usually reduce their taxes by itemizing expenses for mortgage interest, taxes, charitable contributions, medical care, casualty losses, and other miscellaneous deductions. If you work with a professional tax preparer, you may deduct the fees you paid to have the return prepared.
If an individual’s AGI exceeds $259,400 filing single or $311,300 if you’re married filing jointly, the total of certain otherwise allowable itemized deductions is reduced by the lesser of:
- 3% of the excess of AGI over $259,400 single, $311,300 MFJ or QW, ($155,650 MFW or $285,350 HOH) or
- 80% of the itemized deductions subject to the limit and otherwise allowable for the tax year
The reduction does not apply to deductions for medical expenses, investment interest, nonbusiness casualty losses and gambling losses.
Casualty and theft losses are deductible in the year the loss was discovered. Uninsured losses caused by theft, vandalism, fire, storm, or similar causes are deductible only if you itemize and only to the extent they exceed 10 percent of your adjusted gross income (AGI). The first $100 in losses for each event is nondeductible.
Texans won’t want to overlook the state and local sales tax deductions. Texas taxpayers who itemize their tax deductions may either save their receipts or use the IRS sales tax tables to determine how much to deduct.
Other common deductible expenses include home mortgage interest expense on up to $1 million in home acquisition debt ($500,000 for MFS) and $100,000 ($50,000 MFS) in home equity debt, state and local income and property taxes, and charitable contributions to qualified organizations.
Gifts of $250 or more require a statement from the charitable organization showing the amount contributed and whether you received any goods or services in return. A canceled check is not sufficient proof. If you give a non-cash gift worth more than $5,000, you must get a qualified appraisal to deduct it.
No deduction is allowed for most contributions of clothing and household items unless the donated property is in good used condition or better.
Medical expenses exceeding 10 percent of your AGI also may be deducted (7.5 percent if you or your spouse is 65 or older in 2016). For AMT, medical expenses must exceed 10 percent of AGI to be deducted. Examples of deductible medical expenses include fees for doctors, dentists, chiropractors; insurance premiums for medical and dental insurance; prescription medications; hospital care; X-ray and laboratory services; and other related costs.
Miscellaneous expenses exceeding 2 percent of your AGI are deductible. This category includes un-reimbursed employee business expenses, investment expenses, and tax preparation fees, among others.
I sold some stock this year, but I know I have to think about capital gains taxes.
Due to the American Taxpayer Relief Act, tax issues related to capital gains has undergone significant changes. Beginning this year, if your income is over $200,000 ($250,000 MFJ) you may be subject to a net investment income tax equal to 3.8% of the lesser of:
- Net investment income (NII), or
- The excess (if any) of modified adjusted gross income (MAGI) over the threshold amount ($200,000 filing single, $250,000 MFJ, or $125,000 MFS).
Example: For 2013, Sam, a single filer, has NII of $90,000 and wages of $180,000 (MAGI equals $270,000). Sam is subject to NII tax on $70,000, the amount by which his MAGI exceeds the $200,000 threshold amount, because that is less than his NII of $90,000. Sam’s NII tax is $2,660 ($70,000 x 3.8%)
Variation: Assume Sam’s NII is $90,000 and his wages are $210,000 (MAGI is now $300,000). Because his MAGI exceeds the $200,000 threshold by $100,000, he is subject to NII tax on $90,000 (lesser of NII or the $100,000 MAGI excess). Sam’s NII tax is $3,420 ($90,000 x 3.8%).
I’ve heard CPAs talk about bunching my deductions. What is it and how does it work?
If you tallied all qualified expenses and came up short for 2015, don’t assume you can’t itemize in future years. Consider alternating between taking the standard deduction one year and “bunching” deductible expenses into the year you itemize. Bunching refers to the process of timing your expenses so that they are higher in one year and lower the following.
The easiest deductions to juggle between tax years are charitable contributions, state and local income and property taxes, and your January home mortgage payment. For example, you could double up on your charitable contributions and make them every other year rather than annually. In the year you decide to itemize, you can make your January mortgage payment in December to boost your mortgage interest expense.
You should also try bunching deductions subject to AGI-based limits like medical and dental expenses and miscellaneous itemized deductions. Timing elective medical procedures, such as braces and laser eye surgery, is a common way to qualify for the deduction.
But remember, the AGI-based phase out of itemized deductions does apply for 2016. A CPA can help you with your tax situation this year.
I’ve already filed my return, but I just realized that I could have gotten a refund by itemizing my deductions. What should I do?
If you are willing to recalculate your taxes, you can file an amended return. Form 1040X will let you negate your original standard deduction and, in its place, list all the money-saving deductions you should have taken.
Just be sure you still have the paperwork and receipts to substantiate your deductions in the event of an audit. Generally, tax returns must be amended within three years of the original filing deadline. A CPA can help you correct your past returns and provide you with additional strategies for timing your deductions to maximize your tax savings.
| American Institute of Certified Public Accountants
||Texas State Board of Public Accountancy