By Dean Alexander
Can Itemized Deductions Benefit Me?
This time we continue to discuss issues that are relevant to preparing the tax return. We want to continue to talk about itemized deductions. We have previously talked about taxes and interest as part of those deductions. But maybe we should ask the more elementary question: what are itemized deductions after all?
We all assume that if we make a certain amount of money as wages this amount will be taxed. In fact, that is not totally correct. This amount goes through several modifications. Congress decided to let us give people a break. So it arbitrarily gave some deductions to reduce the income that will be subjected to income tax, which is, of course, a good thing.
They decided that every taxpayer should enjoy this break. Did they give the same amount of break to everyone? The answer is simply no. The break which is called the standard deduction will depend on your filing status. For example, currently if you are single, it is $5,800. If you are married it is double that ($11,600 – no discrimination against married people there.)
Then comes the power of the lobby. People who want to sell a home want special treatment for those who buy homes to encourage home ownership and hence home sales (not a bad thing either.) Others pitched in. So, you will find that you can deduct some money for the church donation, some for bookkeeping and so on. That is how we ended up with what we call itemized deductions.
The question is: can I take the amount that the government decided to give me on its own (the standard deductions) and the itemized deductions as well? The answer is no. You pick your poison. You add the itemized deductions and you compare them to the standard deductions and as a rational human being you choose the higher amount for your tax.
Most people who have homes end up benefiting from the itemized deductions because they pay thousands in interest and taxes on the home. Then they pile up other expenses such as donations and tax preparation fees, to give some examples.
Accordingly if you don’t have a home and you paid a thousand dollars to your church and three hundred and fifty to your CPA or tax attorney to do your taxes, you will find yourself abandoning those expenses and use the higher standard deduction.
But if you have a house and you pay twenty thousand dollars on interest and taxes you will definitely be able to add the tax preparation fees and charitable contributions to the items you are already deducting. That is why they talk about the tax advantage of buying a house.