If you decide to itemize on your taxes, you won't have a lot of company. According to the Internal Revenue Service, only about one in every three taxpayers chooses this method of whittling away at his tax liability. If you do elect to itemize, however, the IRS considers a lot of expenses to be tax deductible. The catch is that you usually need a lot of them to make it worth your while.
What You Can't Deduct
If you itemize, you can't claim the standard deduction for your filing status. It's an either-or situation. As of the 2012 tax year, the standard deduction for a married couple filing jointly is $11,900. If you’re single or elect to file separate married returns, it's $5,950, and if you qualify as head of household, it’s $8.700. If all your itemized deductions don't add up to more then the standard deduction for which you qualify, itemizing means you'll pay more in taxes.
If you do decide to itemize, you can claim some of the taxes you paid during the year, although not those that you paid to the IRS. State income taxes are deductible, or -- through the 2011 tax year -- you could choose to deduct state and local sales taxes instead. This option was particularly helpful to taxpayers who live in states without an income tax. The Wall Street Journal reports that financial experts believe Congress is likely to act to extend the sales-tax deduction for the 2012 tax year and beyond. If you're a homeowner, you can claim your property taxes, and if you purchased a car, these taxes are deductible as well.
Medical and Dental Care
If you spend a great deal on medical or dental costs, including health insurance premiums, you can claim these expenses when you itemize. There's a catch, however, so you'll need a lot of them to make this deduction worthwhile. As of 2012, they must exceed 7.5 percent of your adjusted gross income, so the more you earn, the less likely it becomes that this deduction would be advantageous to you. You can only deduct the portion of your expenses that exceed 7.5 percent of your AGI, and this threshold increases to 10 percent in 2013. If your employer pays any portion of your insurance premiums, this part is not deductible.
The IRS allows you to deduct almost anything you spend to earn income, but most of these expenses fall into the category of "miscellaneous deductions" so a threshold applies to these as well. In this case, however, it's only 2 percent of your AGI. Miscellaneous deductions include things like buying and cleaning work clothes, although only for items you wouldn't under other circumstances, such as a nurse's uniform. You can deduct union dues and costs to educate yourself in your profession. If you invest your earnings, you can deduct fees associated with doing so. If you pay someone to prepare your taxes, you can claim this expense as well.
Generosity is tax deductible. You can deduct cash gifts dollar-for-dollar, but if you give tangible property, you can only deduct its fair market value. For example, if you donate your television to a shelter, you can't claim what you paid for it but only what it was worth when you gave it. The rule of thumb for determining fair market value is what a "willing buyer" would pay from a "willing seller" -- for example, what you might get if you tried to sell the item at a garage sale. You also have to file an additional form with your tax return for any single gift in excess of $500, and your gift only counts if you give it to a qualified charity.
- IRS: In 2012, Many Tax Benefits Increase Due to Inflation
- IRS: Topic 502 – Medical and Dental Expenses
- Harris & Company: List of Common Itemized Deductions
- SmartMoney: Miscellaneous Itemized Deductions
- Bankrate.com: Miscellaneous Tax Deductions
- Kiplinger: IRS Red Audit Flags – The Dirty Dozen
- Wall Street Journal: Will Sales-Tax Deduction Live On?
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