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Standard vs Itemized Deductions on the US Tax Return

Standard vs Itemized Deductions on the US Tax Return
Ines Zemelman, EA
05-Jun-17

The age old question everyone has when reviewing their tax return --- is my accountant utilizing all deductions available to me? Am I in the most optimal position -- explained below.

What is the standard deduction?

The standard deduction is the amount that the IRS allows everyone to deduct from their taxable income, without any supporting documentation. Like all other IRS calculations, the amount will vary depending on your filing status.

 

Standard Deduction Chart for Most People*

Filing Status

Standard Deduction Amounts

Single or MFS (Married Filing Separately)

$6,300

MFJ (Married Filing Jointly) or Qualifying Widow(er) with dependent child.

$12,300

HOH (Head of Household)

$9,300

 

*If born before 1952 or blind, the numbers vary. Please refer to the IRS table (we did not want to clutter this article with tables, and we will handle all these calculations for you during tax preparation)

What is an itemized deduction?

When filing your tax return, you can either choose the standard deduction (see above), or you can itemize your deductions - this would be outlined on Schedule A.

Now - which should you choose? What are the main deductions that I can use? Should I spend time itemizing my receipts? 

The big reveal

In general, itemized deductions fail unless:

  • You paid $6K to $12K mortgage interest on main home - depending on your filing status - (we ask this separately on your tax questionnaire)
    • Note - this itemized deduction is being mentioned in the news as a potential change in the tax law
       
  • Or you paid $6K to $12K in US state taxes (we also ask this separately on the TQ)
     
  • Or you have made about the same amount of charitable contributions to US charities (we also ask this separately on the TQ)

For most people, listing various itemized deductions that you found on IRS website is just a waste of your time.

These additional itemized deductions have purpose only as possible increment to major itemized deductions.

What? How can this be? My accountant always gets me big deductions!

If you do not have major expenses, other deductions will almost always be lower than standard deductions.

Let’s examine the numbers.

  • Medical expenses have a 10% floor (only expenses exceeding 10% of your adjusted gross income can be deducted)

This means that if your adjusted gross income is $100k, only medical expenses exceeding $10k are eligible for deduction. Note - expenses you are not able to claim with this deduction include: Cosmetic surgery, gym memberships, over-the-counter medication, insurance premiums paid by your employer, and insurance premiums which were paid prior to taxes being deducted from your salary.

  • Miscellaneous expenses have a 2% floor

This means that if your adjusted gross income is $100k, only miscellaneous expenses exceeding $2k are eligible for deduction.

  • Miscellaneous expenses constitute unreimbursed employee expenses, tax preparation fees, and certain other expenses.
  • Note - unreimbursed expenses are generally high risk deductions subject to higher risk of audit.
  • To be deductible, the expense must be:
    1. Paid or incurred in the tax year
    2. For carrying on your trade or business of being an employee, and
    3. Ordinary and necessary 

       
  • An example of a valid unreimbursed business expenses is the business use of your home; the cost of internet and telephone - under the condition that you use your home as an office for the convenience of your employer
    • Note - you should be ready to prove that working remotely is the standard or preferred work arrangement at your workplace.
  • If you work from home because you have a baby and your employer allowed you to work remotely, deductions are not allowed because they are incurred for your convenience.

Unless we see that you will owe tax, and are looking for ways to improve your tax position, we do not ask those questions because we value your time and do not want to ask redundant questions.

If you owe $0 tax, listing itemized deductions won’t increase your refund.

Zero tax is zero tax. Deductions reduce your taxable income to 0, but cannot bring you to a refund.

Is there a cap to how much I can itemize? I had a lot of expenses!

Yes - like all good things in life, there is a limit. If your adjusted gross income exceeds the following you may be subject to a limit on some of your itemized deductions

2016 Limits for Itemized Deductions start above the following for most People*

Filing Status

Adjusted Gross Income

Single

$259,400

MFS (Married Filing Separately)

$155,650

MFJ (Married Filing Jointly) or Qualifying Widow(er) with dependent child.

$311,300

HOH (Head of Household)

$285,350

 

Are there scenarios when I am required to itemize?

Yes - if you and your spouse file separately, you must use the same method of claiming deductions. If one itemizes, so should the other, or they will not qualify for the standard deduction. It may be unfair to other spouse if one writes orr mortgage interest and while other has nothing to deduct and cannot use standard deductions - well, these are the rules.

The other scenario where you are not eligible for the standard deduction is if you are a non-resident or dual status alien.

Electing not to use itemized deductions even if they exceed standard deduction amounts.

There are certain situations where utilizing a lower standard deduction can give a better result than itemized deductions, even if itemized deductions may be very high.

Your high priced accountant may be charging you up the wazoo to itemize deductions that worsen your tax position. Let us explain.

  • It may happen to taxpayers subject to AMT (Alternative Minimum Tax). When itemized deductions change to standard, the AMT goes away.
  • Another situation is where you receive a state refund. If deductions are itemized, the amount of refund will be included to your federal income the following year. 

The same refund received under the standard deductions option will not be taxable in the following year. These are just two examples.

So what are you saying? This is all pointless?

No, certainly not. What we are suggesting, however, is that you shouldn’t let your tax return take over your life and stress you out. If you do owe tax, then work with your tax preparer to determine if there are possible deductions available to you that can improve your bottom line, but saving shoeboxes of receipts all year long, when it will not benefit you, is not a strategy that we are recommending.

Ines Zemelman, EA
Ines Zemelman, EA
founder of Taxes for Expats
She may be reached at: