How to itemize deductions for the 2022 tax season
Real estate may be about “location, location, location” – but when it comes to taxes, think “deductions, deductions, deductions”.
A deduction reduces the income on which you are taxed. A deduction can mean a lower tax bill, while a credit can even directly reduce your tax bill.
“A tax deduction lowers your taxable income and thus lowers your tax liability,” Nerdwallet.com reported. “You subtract the amount of the tax deduction from your income, which reduces your taxable income. The lower your taxable income, the lower your tax bill.
A tax credit, on the other hand, is a dollar-for-dollar reduction in your actual tax bill. Most credits are not actually refundable, but a few are. This could mean that if you owed $250 in taxes, but were entitled to a $1,000 credit, you would actually be refunded the difference.
“There are two ways to take deductions on your federal tax return: you can itemize the deductions or use the standard deduction. Deductions reduce the amount of your taxable income,” the IRS explained.
First, there is the standard deduction. The value of the standard deduction varies according to your income and your age. There are also deductions for those who may be legally blind. However, some taxpayers cannot use the standard deduction, such as: a married person filing as married but filing separately whose spouse details deductions; a natural person who files a tax return for a period of less than twelve months due to a change in his annual accounting period; an estate or trust, pooled trust fund or partnership; or an individual who was a nonresident alien or dual status alien during the year. However, nonresident aliens who are married to a U.S. citizen or resident alien at the end of the year and elect to be treated as a U.S. resident for tax purposes may qualify for the standard deduction.
Alternatively, taxpayers must itemize deductions if the itemized deductions allowed are greater than the standard deduction, or if you need to itemize deductions because you cannot use the standard deduction.
“You may be able to reduce your tax by itemizing deductions on Schedule A (Form 1040), Itemized Deductions,” the IRS explained. “Itemized deductions include amounts you paid for income or sales taxes, property taxes, personal property taxes, mortgage interest and disaster losses. You can also include donations to charity and part of the amount you paid for medical and dental expenses.
Individual itemized deductions may be limited, but you may benefit if you cannot use the standard deduction; had significant uninsured medical and dental expenses; paid mortgage interest or property taxes on your home; had large “Other itemized deductions” (line 16 of Schedule A (Form 1040)); suffered significant uninsured loss or theft as a result of a federally declared disaster; or makes significant contributions to qualified charities.
Here are some tax deductions you can itemize: mortgage interest of $750,000 or less, mortgage interest of $1 million or less if incurred before December 16, 2017; up to $250 for educators who purchase classroom supplies; medical and dental expenses, which represent more than 7.5% of adjusted gross income; local and state income, sales, and personal property taxes up to $10,000; gambling losses; investment interest charges, and even up to $2,500 in student loan interest – in the latter case, they do not need to be listed on Schedule A, but can be taken above the line and subtracted from your taxable income.
As Investopedia also explained, itemized deductions help some taxpayers lower their annual income tax bill more than the standard deduction would. In addition, the remaining itemized deductions include several categories such as medical expenses, mortgage interest, and charitable donations. Finally, he suggested that the breakdown most often makes sense for high-income earners who also have a number of large expenses to deduct.
Financial experts recommend keeping detailed records and, if in doubt, consulting a professional tax filer.
Peter Suciu is a Michigan-based writer who has contributed to over four dozen magazines, newspapers, and websites. He writes regularly on military small arms and is the author of several books on military headgear, including A gallery of military hairstyleswhich is available on Amazon.com.