Since you can decide every year whether you want to take the standard deduction or itemize your deductions, careful tax planning can help you maximize your deductions in years you itemize.
Maximizing your deductions
Many of your everyday expenses can be itemized as deductions on your income tax return, saving you lots of money at tax time. However, unless you have a large amount of qualifying expenses, you might be better off taking the standard deduction, as most taxpayers do. Since you can decide every year whether you want to take the standard deduction or not, careful tax planning can help you maximize your deductions in years you itemize.
Only certain expenses can be classified as itemized deductions. To maximize your deductions, you'll have to have expenses in the following IRS-approved categories:
- Medical and dental expenses
- Deductible taxes
- Home mortgage points
- Interest expenses
- Charitable contributions
- Casualty, disaster and theft losses
- For tax years before 2018 - Certain miscellaneous expenses and non-reimbursed employee business expenses including:
- Investment expenses
- Union dues
- Business use of home
- Business use of car
- Business travel expenses
- Business entertainment expenses
Your expenses in certain categories must cross various thresholds in order to itemize. For example, your medical and dental expenses are only deductible to the extent they exceed 7.5% of your adjusted gross income (AGI).
Starting in 2018, miscellaneous and non-reimbursed employee expenses are no longer deductible for federal taxes. For tax years before 2018 these expenses must exceed 2% of your AGI before they become deductible. Some states have not fully aligned with the recent tax law changes and allow itemized deductions for these types of non-reimbursed employee expenses.
Bunching your deductions can maximize the value you get out of them, especially in categories where you have to cross a minimum threshold. For example,
- If you have medical expenses every year that equal 7% of your AGI, you'll never get to itemize those deductions.
- But, if you can push any of those regular expenses into the following year, you may have more than 10% of your AGI in expenses in one year, instead of 7%.
- In this scenario, a portion of those expenses may become deductible.
Spend when itemizing
If you intend to itemize in any given year, it makes sense to generate as much spending as possible in deductible categories to get the maximum effect. While spending just to generate a deduction isn't advisable, if you've been holding off on certain purchases, it makes more sense to make those purchases during a year in which you itemize.
For example, if you have been delaying certain medical treatments, you'll get more mileage out of your deductions if you spend that money in a year when you're already over the medical deduction threshold.
Follow a checklist
If you take certain deductions every year, you might get in the habit of overlooking other available options. Keeping a checklist of available deductions can help you unearth both one-time and everyday expenses that you can actually deduct. For example,
- If you have gambling losses, you can deduct those up to the extent of your gambling winnings.
- You might regularly take deductions for charitable contributions, but you may also be able to deduct your mileage and expenses for travel to and from a charity.
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