Standard or Itemized: Don't Miss These IRS Deductions
About 46 million Americans take advantage of itemizing their IRS tax deductions. This adds up to nearly one trillion dollars. Another eighty-five million claim over half a trillion dollars with the standard deduction. Don't know which you should choose?
Standard Deduction versus Itemized Deduction –
Deciding whether to take the standard deduction vs. itemized deductions on tax returns can be tricky. Proper records must be kept, receipts and bills must be saved, and an accurate account of these deductions must be listed on IRS Schedule A. The standard deduction, on the other hand, is much simpler and may be the better choice if itemized expenses equal an amount less than an individual’s allowable standard deduction.
You can use our online tax preparation software to see how big a deduction itemizing will afford you and if it is going to be larger than using the standard. We want to make sure that our users get the most money back into their pockets. It is our goal not to leave even one dollar behind.
To keep you thinking about deductions for this and future years here are a few that many taxpayers don't realize or bother taking advantage of. State sales taxes are deductible, and if you live in a state that doesn't impose an income tax, this deduction can be beneficial. While there is a standard amount that is typically used, you should keep your receipts if you've had major purchases, like a vehicle, since you may qualify for a larger deduction.
Any out-of-pocket charitable donations and contributions can also save you money, and if you drove your vehicle as part of charity work, you may also be able to include expenses for the mileage. Four basic categories of car and truck expenses are deductible on income tax returns. For three of them, you must itemize your deductions on Schedule A. First, you can deduct your use of your vehicle for charitable services under your charitable expense deduction. A standard deduction rate per mile applies. Second, you can deduct your use of your vehicle for driving to and from medical care providers and include it under itemized medical expenses. Again, a standard medical deduction rate per mile applies. Third, you can deduct expenses related to business use of your vehicle; however, you cannot deduct costs such as miles driven on your regular commute and vehicle expenses for which your employer reimburses you. The fourth category of deductible car and truck expenses, moving expenses to start a new job, does not require you to itemize deductions. To qualify for this deduction, you must move at least 50 miles from your current home.
Un-reimbursed medical expenses can add up to a large amount of money even if the patient has health or dental insurance. This is where itemized medical deductions can come in. The federal government allows taxpayers to write a portion of these medical expenses off of their tax returns when they exceed the 7.5% of their adjusted gross income.
Medical expenses include more than just payment to doctors, surgeons and dentists. The insurance premiums that people pay every month and even the amount of money that they spend on transportation to obtain medical care can qualify as medical deductions. The amount of money spent to obtain a diagnosis and to treat a disease are classified as medical expenses. Any equipment that is needed to treat a medical condition can also qualify. Payment to a long-term care facility is a medical expense, even a portion of the premiums for long-term care insurance can qualify. Qualifying expenditures are those related to treating a medical condition and also those that are related to the prevention of diseases.
In 2013, government officials increased the threshold from more than 7.5% to more than 10% of the taxpayer’s adjusted gross income. Americans 65 years of age and older were initially exempt from the threshold increase, but this exemption ended on December 31, 2016.
Individual taxpayers who lend money for non-business purposes and do not receive full repayment may be able to deduct some or all of that bad debt on their federal tax return. To qualify, the taxpayer must have outstanding bona fide, or genuine, debt and no reasonable expectation of repayment.
A taxpayer can file an amended return to claim a bad debt deduction at any time within seven years from the tax return due date for the year the bad debt deduction is being claimed.
Although non-repayment of debt is not ideal, taxpayers who have no reasonable expectation of repayment may be able to deduct bad debt from their tax returns.
Working as a self-employed individual can be a rewarding experience for many reasons. On the other hand, one of the greatest frustrations of working as a self-employed individual is paying 100% of your employment taxes. Medicare and Social Security employment tax is typically 12.4% of one's income. While an employer would pick up half of this, a self-employed individual pays the full amount. The good news is, these individuals may be eligible to deduct 50% of this tax on their return, thus effectively paying the same as a W2 employee. For more on self-employment deductions click here.
Which Un-Reimbursed Employee Expenses Qualify as an IRS Deduction?
When employees accrue substantial un-reimbursed expenses do to their employment, it can sometimes result in an additional deduction on their tax return. If you ever take a close look at deduction opportunities on itemized deduction form (Schedule A), you may notice a section for "Job Expenses and Certain Miscellaneous Deductions." While you cannot deduct all expenses that fall into this category (only those that are in excess of 2 percent of your adjusted gross income each year) it can provide some relief for those employees with substantial un-reimbursed expenses.
Requirements of Each Employee Expense
The 2 percent floor mentioned above may affect the amount that you can claim for un-reimbursed employee expenses. Furthermore, there are restrictions on what kinds of expenses qualify for this deduction. Each expense must first meet three basic qualifications:
- Have been paid or incurred during the tax year
- Be for carrying on your trade or business of being an employee
- Be considered "ordinary and necessary"
An expense is considered "ordinary" if it is commonly accepted in your line of business. "Necessary" expenses are those that are helpful or appropriate in your role as an employee. Technically, this expense does not have to be required for it to be considered necessary under this definition.
Examples of Commonly Used Un-Reimbursed Employee Expenses
Your deduction can include virtually any expense that you have as an employee that fits these three requirements and was not reimbursed by your employer. Expenses that end up falling into this category typically include:
- Business use of your vehicle
- Travel expenses for business
- Business-related meals and entertainment
- Parking fees and tolls
- Use of your home
- Dues to professional societies
- Licenses and regulatory fees
- Medical examinations required by your employer
- Union dues and expenses
- Work clothing and uniforms (if required and not able to be used for everyday wear)
There are other expenses that may qualify as an employee expense as well. If you purchased an item or otherwise spent funds for your job, you may have a deductible expense. Just be sure that it meets the three criteria listed earlier.
It is important to note not all of these expenses are fully deductible. Meals, for example, can only be deducted by 50 percent of the total cost. Part of the reason for this is that the IRS assumes that you were going to eat anyway, regardless of whether you were engaged in business activities at the time. However, the agency does allow a partial deduction because when you eat for business, you are likely spending more money than you would be if you had the option to eat at home. Business use of your vehicle is another example that is only partially deductible.
Looking for more? You can find more information on other popular IRS deductions in the following articles:
Deductible Life Events