Nearly 2/3 of American taxpayers take the standard deduction each year without giving much thought to the possibility of saving money by itemizing their deductions.
For many, this makes sense, but for others, it’s akin to throwing money to the wind.
For 2017, the standard deduction is $6,340 for single filers and $12,700 for married couples. If you rent your dwelling and don’t have large medical expenses, the standard deduction is probably best for you.
It’s simple. You don’t have to keep receipts and records of your expenses, and you don’t have to spend any time trying to understand tax laws. You can probably file your taxes without the aid of a tax accountant, which will also save you a few dollars.
However, if you have a home mortgage, or even own your home outright but live where property taxes are extreme, you should take a look at itemizing.
You should pay special attention if you’ve purchased your home within the last few years, because the first years of a mortgage loan are heavily weighted to interest, and that interest is deductible.
Say you purchased a home in 2017 and have a $400,000 loan at 5% interest. The first year you’ll pay $19,866 in interest – far more than the standard deduction for couples. On top of that you can deduct your real estate taxes and if you paid points to lower your interest rate, that’s also deductible.
How do you know what you’ve paid? Your lender will have sent you a Form 1098 which lists the amount you paid in mortgage interest. If you had an escrow account to pay taxes and property insurance, you’ll also see how much was paid and on what dates. If you pay your own property taxes – look in your checkbook or your bookkeeping records.
If your mortgage interest and property taxes exceed the standard deduction, the rest of your possible deductions are a savings bonus. They are:
- Personal property taxes
- State or local income or sales taxes (not both)
- Gifts to charities
- Medical, dental, and health insurance expenses that exceed 7.5% of your income
- Casualty and theft losses
- Unreimbursed employee business expenses
If you’ve owned your own for 20 or 25 years, the amount you pay in interest is much smaller, so you’ll need to add up all of your deductions to see if itemizing will be a benefit.
Take the time to look at these numbers carefully, because even at a tax rate of 25%, $1,000 in deductions will save you $250.
Note that what works this year may not work next year.
Under the new tax laws, the standard deduction will be nearly double – $12,000 for singles and $24,000 for couples filing jointly.
The deductions will also be changing. Today you can deduct all interest on a home loan of up to $1,000,000. Next year that drops to $750,000. In addition, property and income tax deductions will be limited to $10,000.
If you want to make a calculation before hiring a tax accountant, get IRS Form 1040 Schedule A (https://www.irs.gov/pub/irs-pdf/f1040sa.pdf) and fill it out. It will take a few minutes, but by the time you’ve finished you will have gathered the information a tax preparer will need.
Considering that you could save hundreds of dollars by itemizing, doing those calculations will be time well spent.
Do you need a tax accountant? Call the Mike Clover Group at Homewood Mortgage. We’ll be glad to furnish you with a list of trusted professionals.
Call today: 800-223-7409