Should I Itemize Deductions this Year?

Ever wonder what the actual effect of a charitable deduction really has on your taxes? Does it really make a difference? When and how?

You might wonder what that has to do with itemized deductions. Well everything actually. While charities like to advertise the tax deduction benefit to incentivize you, this benefit only applies in certain cases. It only decreases your tax liability when you're itemizing your taxes.

Charitable deductions are one of many items you can deduct if you choose to itemize. However, for most people the standard deduction will end up being higher. Before you make any decisions it’s good to know what the actual standard deduction is.

2011 Standard Deduction:
· Married, Filing Jointly: $11,600
· Head of Household: $8,500
· Single: $5,800
· Married, Filing Separately: $5,800
· Blind or over 65 and married: $12,750
· Blind or over 65 and single: $7,250

As you can see these deductions are pretty high and unless you've been tracking your expenses all year or had a major expense, you will be better off taking the standard. So now lets look at the two major reasons you should consider itemizing:

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1. High Medical Costs
Medical expenses are tricky. The problem here is that not all expenses count and you can’t deduct dollar for dollar. Medical expenses you can deduct include: insurance premiums, prescription drugs, and treatments that are not covered under insurance. Secondly, you can only deduct expenses that exceed 7.5% of your AGI. That means, for example, if your AGI is $40,000, your “7.5% limit” is $3000. Once you add your expenses, you need to subtract $3000 and that’s how much you can actually deduct. Check the IRS website for a more detailed explanation of both requirements.

2. Mortgage Interest
The home mortgage interest deduction is a lot simpler to figure out. Basically, if you pay interest on “loans to buy a home, home equity lines of credit, or construction loans,” you are legally liable, and it’s only on your main home and a second home you can deduct the interest paid (Taxes, William Perez).

Very rarely will it be worth it to itemize if you do not have one of these two expenses, but here is a good list of deductions you can include.

TIP: if you realize you have enough deductions and you wan't to itemize, start gathering your documents and remember to keep track of your expenses for next year!

Want to eliminate the stress of filing taxes?

Now that I'm in my second year of VITA (Volunteer Income Tax Assistance a program of the IRS) I feel like I've observed and learned enough to decipher what a person can do to make the tax return process a whole lot easier.

BE ORGANIZED
The best thing you can do to make filing your taxes a more painless experience is to come organized. This is especially important if you are a small business owner or filing itemized deductions. If you have a small business, keep track of your receipts, track your mileage, and add up your income before you get to the site. The same goes for people filing a schedule A - itemized deduction. It’s ok if you don’t know exactly what you can deduct and what you cannot, but if you’re planning on using it, keep all the receipts and organize them. A tax preparer’s worst nightmare is a client walking in with a shoebox of papers and receipts, expecting the preparer to go through each and every item  with the client.

If you want to be completely prepared (which will be beneficial to you, because the return will have a higher chance of being correct – there’s actually a study on that), I will write a second post on how to determine whether or not to file itemized deductions and a third post on tips for small business owners.

BRING LAST YEAR’S RETURN
If you want to hurry the process along, bringing your previous year’s taxes is the best way. Even if you’ve had many changes in the past year, having last year’s return will give the preparer an idea of what will need changing. It can trigger more questions to make sure you’re filling correctly and can answer questions about this year’s taxes (such as: was your EITC disallowed last year? did you itemize last year? did you claim dependents last year?) These questions may sound simple or obvious to you now, but often time people start second guessing themselves or maybe someone else answered them the year before. Oh and another reason you should bring last year’s return: sometimes the way you write your name or the way it is written on the Social Security card does not coincide with your taxes. Thus, brining last year’s taxes could prevent a reject and get you your refund faster!

GET A BABYSITTER FOR THE KIDS
Seriously, get one…or at least bring something VERY entertaining for your kids (age 0-6). Having children at the tax site brings a high level of stress to EVERYONE.  I realize sometimes it’s unavoidable, but if there were any way you can leave them at home, everyone would appreciate it. When neither the client nor the tax preparer can hear each other over a screaming child, or they are distracted because the child is making photocopies of their hand, it will take a lot longer and become tiring very quickly.

LAST THING
If you make around $50,000 or less, go to a VITA site! It's completely free and a volunteer, trained by the IRS, will be taking you through the return. If you live in the Bay Area, check out earnitkeepitsaveit.org for a site near you.  No one will be charging you extra fees for a refund or an extra form that needs to be filled out. All sites file electronically so you will be able to get your refund fast, and most sites are nonprofit i.e. really friendly people who are most likely going to offer you other free services while you’re there!