You would probably be safe in betting that most people don’t take all of the itemized deductions they are allowed to take. The main reason is that there are an enormous number of deductions in the tax code, and it’s almost humanly impossible to know them all unless you are a tax expert. But there are some deductions that are more common than others simply because they apply to more people.
When completing the annual Form 1040, most people must decide between taking the standard deduction or itemizing. You can’t do both. You will choose the standard deduction when your itemized deductions are not enough to exceed the standard deduction. The standard deduction is a fixed dollar amount that is determined by the filing status you chose – married, single, head of household and so on. Taxpayers who are blind, aged 65 or older or both can take an additional deduction subject to IRS rules. The standard deduction actually lowers the amount of income you have to pay tax on.
If you choose to itemize then you can deduct a number of eligible expenses that can be supported with appropriate documentation. The itemized deductions fall within different categories like charitable contributions, interest expenses, medical expenses, deductible taxes, casualty and theft losses, business deductions for self-employment or job related expenses and others. There can be a lot of confusion surrounding itemized deductions when it comes to determining which expenses are deductible due to the size and complexity of the tax code.
Don’t Miss Out on Itemized Deductions!
One of the confusing categories of itemized deductions is medical tax deductions. Medical and dental expenses are deductible but only if the total is greater than 7.5% of your adjusted gross income. It’s only out-of-pocket medical expenses that can be deducted, but the list of eligible items has grown over the years. Where once it was mostly expenses for doctors and hospitals that were deductible, now you can deduct expenses for weight loss program fees for certain diseases and smoking cessation program fees and prescription drugs that make nicotine withdrawal easier. Also deductible are prescription drugs, medical expenses related to the diagnosis and treatment of disease, eye glasses and contact lenses, false teeth and insurance premiums.
The medical tax deductions that you include in your itemized deductions are separate from the Archer medical savings accounts and the health savings accounts. The Archer medical savings account is an account set up with a financial institution to save for future medical expenses. There are annual limits on the amount you can deduct but the deduction can be taken whether or not you take itemized deductions. The health savings account is set up with a trustee and the funds you contribute are paid out as medical expense reimbursements. Like the Archer medical savings account, it is tax deductible whether or not you choose itemized deductions.
Another category of itemized deductions that is usually understated on tax forms is the miscellaneous deductions category. The miscellaneous itemized deductions must have been incurred to produce income you have reported, to maintain property needed to produce income, and to deal with tax preparation or to contest a tax. The catch-all category includes appraisal fees, casualty and theft losses, hobby expenses (with limitations), legal fees, tax advice fees and many others. Each item must be evaluated to determine if its deductible.
Itemized deductions offer many ways to lower your tax liability. But it is all too easy to miss expenses that you could have deducted and end up paying more tax than you should. That is why many people choose to use a program like Turbo Tax because it helps taxpayers identify all the expenses they might be eligible for. If you believe you will choose itemized deductions then make sure you take full advantage of all eligible expenses.
