Broker Check
Itemizing Deductions: Is It Right for Me?

Itemizing Deductions: Is It Right for Me?

February 18, 2021

There are four distinct seasons each year, but there is an extra one that rolls around each year no matter how hard we try to avoid it – tax season. Doing your taxes is a necessary occurrence at the start of each new year, and every year you are faced with the same question posed by your tax preparer. Are you going to itemize deductions this year? Itemizing isn’t the best option for everyone, but it is important that you understand what it is and when it could be beneficial to you.

LLCs and Taxes

Every small business owner is interested in saving a little more money whenever it’s time to file their taxes. If you’re just getting your small business off the ground, you may want to officially structure your company as an LLC in your state. This will enable you to establish a separation between your business and personal taxes, so you will not be subject to “double taxation.” If you form your business as an LLC, you’ll be able to take startup deductions, which will ease your tax burden. Plus, you’ll still enjoy state and federal tax benefits in the long run. To make this process stress-free, you can connect with an online formation service. In addition, a savvy accountant can ensure that you take every deduction you’re eligible for at tax time.

What Does It Mean to Itemize?

Before launching into what an itemized deduction is, it is important to first understand what a standard deduction is. According to Learn Vest, the standard deduction is the amount of income that the government will not tax you on, and varies depending on your filing status. When you itemize deductions, you list out each deduction you qualify for. Taxpayers itemize deductions when the sum of all the deductions is greater than the standard deduction. Itemizing allows you to take advantage of all the expenses you had throughout the year and decrease the amount of taxable income on your tax return.

If you opt to have your taxes done by a tax preparer, they will walk you through the itemizing process. You can also use programs to do your taxes (if you’re a business owner, programs like W-2 software and 1099 software are particularly helpful). Once you have entered your expenses on Schedule A, add them up to determine if they are more than your standard deduction. If it is, then copy the total to the second page of your 1040.

According to Money Under 30, the following are the most common expenses that qualify for itemized deductions:

  • Home mortgage interest (allowed on up to first $1,000,000 borrowed and two residences).
  • Property, state, and local income taxes
  • Medical expenses (to qualify they must exceed 10 percent of your Adjusted Gross Income, or AGI)
  • Charitable contributions (limited to 50 percent of your AGI for cash donations, 30 percent for property donations)
  • Miscellaneous deductions such as unreimbursed business expenses, qualified educational expenses, and business use of your home (to qualify they must exceed two percent of your AGI)

What Are Some Benefits of Itemizing?

Other than the obvious benefit of reducing your taxable income, itemizing your deductions can benefit you in other ways as well. According to the IRS, itemizing can help you to better understand your finances by forcing you to take a look at them. For example, once you see just how much you are paying each year in mortgage interest, you may realize that it is in your best interest to refinance your mortgage. Itemizing may also be able help you plan by timing certain expenditures to take advantage of a particular deduction. Medical expenses are a great example of this. Taxpayers can deduct any medical expenses that exceed 10 percent of their AGI. If you know a major medical procedure is going to be necessary, time it correctly to not only improve your health, but reap tax benefits as well. If it is getting to be the end of the year and you know you are going to fall short of the 10 percent threshold, you may benefit by having the procedure done before the tax year ends so that you can itemize some of those expenses.

Itemizing deductions is a unique process, and you may find that you itemize one year and don’t the next. Always be prepared to itemize by keeping a folder labeled with all possible deductions. As you pay each expense, place the receipt, bill, or invoice in the appropriate category to make itemizing your deductions easier each tax season.