As we learned in our previous post Taxes 101: Definitions (miss it? No worries; check it out here!), a deduction is used to help lower a person’s taxable income by making their adjusted gross income (AGI) lower than their gross income. Everyone will need to decide is it more beneficial to take the standard deduction. The standard deduction is the $12,200 or $24,400 for 2019, you get to subtract just for existing as a person/married couple; OR is it more beneficial to itemize your deductions based on what you actually paid throughout the year. This is the part of taxes where higher is better, but be sure they are legitimate expenses you can backup if someone looks for them.
What deduction should I pick?
So what do you get to deduct if you itemize? Generally, the short answer is, anything you paid with post tax dollars (the money you get from your paycheck after taxes, social security, Medicare, etc.) on the allowable list. The most common items are medical/dental expenses (some limits and specific situations), state, local and property taxes, mortgage interest, charitable donations, casualty and theft losses (you can check out the IRS’ official list here, but we like to think we make it easier for you to understand and much more entertaining!). The question then becomes did you pay more than the standard deduction for those items or less? If it’s less than, it makes sense to take the standard deduction because you get to deduct more than what you actually spent. If it’s more, than you want to itemize and deduct the money you have already paid out.
What if itemizing my deductions doesn’t work for me?
There are plenty of other deductions you can get without having to itemize. If the standard deduction works out better for you, you can still lower your taxable income with these deductions. Educator expenses, HSA contributions, half of self-employment tax, IRA contributions, student loan interest, and alimony paid. Like most things in the federal income tax world, there are certain limitations and situations where the deductions apply and some where they are reduced or eliminated. If you can’t fall asleep one night, you can read all about them in the 1040 instructions here. Or you can schedule a free consultation and we can handle it for you from anywhere across the country!