3 Ways to Maximize Itemized Tax Deductions
Bundle Expenses To Maximize Itemized Tax Deductions
There are two types of deductions, standard or itemized. You should choose the one that lowers your taxes the most. Two out of three people claim the standard one because they don't have enough deductions to itemize—or because they aren't aware of how itemized deductions work.
Based on the new tax laws passed by Congress in 2018, more people qualify for the standard deduction than in the past but many will still pour over their receipts like in years past.
Here are the three ways you can potentially increase your itemized deductions.
1. Bundle Medical Expenses to Maximize Itemized Tax Deductions
When you incur medical expenses that are not covered by health insurance, you are only allowed to deduct them from your taxable income to the extent that they exceed 7.5% of your adjusted gross income.
Let’s say you are age 60 and make $50,000 a year. 10% of $50,000 is $5,000. If you have out-of-pocket medical expenses of $5,250, only $250; the amount that exceeds $5,000, would be eligible as an itemized tax deduction.
To maximize the use of this tax deduction, you need to do 3 things:
- Each year calculate an estimate 10% of your adjusted gross income.
- Keep a running total of your out-of-pocket medical expenses each year.
- If you have a year where you are nearing your threshold, determine if there are expenses you can bundle into the current calendar year.
2. Pre-Pay State Taxes
State income taxes paid are an itemized tax deduction on your federal return. Many people can benefit by paying their state income taxes before year end in order to maximize their deductions for federal taxes.
Be careful, as this strategy can possibly throw you into AMT (alternative minimum tax). If you plan on prepaying a substantial amount of state tax, consult with a tax advisor to make sure this strategy will work for you.
3. Casualty Losses
There were over 120 federal national disasters declared in 2018. With that declaration, anybody affected is eligible for a casualty loss deduction for losses incurred as a result of those disasters. The loss must exceed $100 and can be deducted only to the extent that they exceed 10% of adjusted gross income.
For the many Americans that suffered loss due to fires, flooding, and other disasters this deduction could be a welcome relief.
Be sure to check to see which tax deductions have expired and which ones have been extended for the tax year that you're filing for—you may be able to qualify for more than you realize.
Many Itemized Deductions Gone
In the past you could deduct investment fees, tax prep fees, and a slate of theft and casualty losses that didn't require a disaster declaration. When the new tax laws went into effect in 2018, those deductions went away. Although the standard deduction is now higher, the slate of allowable deductions contracted.
If you haven't itemized your deductions in the past, don't rely on old knowledge. Ask for help from a tax professional to avoid costly mistakes.