The most commonly asked question of a taxpayer is that whether there is a need to itemize their deductions. So this article will shed light upon some of the fundamental aspects of Itemized deductions, what is standard deduction and when should a taxpayer itemize or record his deductions.
So first of all we will discuss about the basics of itemized deductions; the definition of the concept, whether the taxpayer qualifies for listings his deductions and if he does qualify, what procedure he has to follow. It is important for the taxpayer to consider that if they make use of tax preparation software, they can easily skim through all of their prospective deductions and can even come to a conclusion whether to do standard deduction or itemize them.
The concept of itemized deductions and what it means to the taxpayer?
As the taxpayer file for his or her federal tax return for the present 2018 year, he or she will be asked to choose from the two options. Either the taxpayer figure out his itemized deductions through calculation or take the standard deductions. Keep in mind that when itemized deductions are calculated, standard deduction is a pre-set amount set by the Internal Revenue Service that is dependent upon the status of your filing. By status it is meant whether the taxpayer is filing jointly (married and filing is a mutual) or single. If the taxpayer is not eligible for itemized deductions, the only option left to choose is standard deduction.
Itemized deductions provide the taxpayer with the advantage of reducing the amount of money that goes in taxes at the end of each tax year. Once you subtract the standard or itemized deductions from your adjusted gross income, the amount you will get will be the one that goes in taxes.
In what circumstances does a taxpayer itemize his deductions?
The different types of expenses that a business owner taxpayer or an employed taxpayer face throughout the year come under the category of itemized deductions. It so happens that when the amount of overheads exceeds the amount of standard deduction that is predefined by US Treasury department bureau, IRS, then the taxpayer should itemize the deductions rather than taking in to account the figure set by IRS.
What expenses are eligible to go under the category of itemized deductions?
The commonplace expenses or overheads that qualify for itemized deductions include healthcare expenses, charitable contributions, property and income taxes, paying of interest on mortgages, expense of the interest that incurs on investments the taxpayer makes on multiple holdings and other diverse expenses.
Let us now look at some of the expenses that come under the itemized deductions category
As long as the home equity loan is less than 100,000 dollars, the taxpayer is eligible to deduct interest on the amount he has borrowed. It means that if you take a second loan from a financial institution to buy a house for yourself, the interest on the loan which you are indebted to pay either in installments or specific time period is deductible and fall under the category of Itemized deductions.
Itemized deductions and the taxes
The taxpayers should bear in mind that if they own a home, they can only deduct the property tax and not the prepaid taxes. They can only subtract that taxable amount which is allocated to them on that tax year in which they are filing for their taxes.
On the year when the taxpayers are filing for their taxes, they can also enjoy the perk of itemized deductions by deducting the amount of city tax that comes from their income.
The legal formalities of itemized deductions
On the top of page two of your form 1040, you will find that option of choosing either the standard or itemized deduction. So, if you choose the latter option, you need to file a Schedule A form in order to figure out your itemized deductions. This form will help the taxpayer to separately calculate all the expenses that come under itemized deductions and once the amount is deduced, the taxpayer can then write it in the form 1040.
Therefore whatever deduction option you use either standard or itemized deductions, both of them ease your tax burden by reducing the amount of money that goes in taxes. So, if you are using the itemized deductions option, it is recommended that you observe a detailed book-keeping of your all expenses that qualify for this type of deduction.
