Most people want to make more money without necessarily paying more taxes. We will leave the making more money part up to you but we can help with the paying less taxes part. Usually this means finding more deductions.
As the first installment in this series we need to set things up. A little history and a few definitions can go a long way in understanding how to decrease your tax burden when the filing deadline arrives. Probably the first item to mention is “adjusted gross income”. This is the last number on the first page of your Form 1040. It is the net result of subtracting from all your items of income (wages, interest, dividends, capital gains etc…) adjustments such as retirement contributions, moving expenses and HSA deposits. Your adjusted gross income is used in several different areas of your itemized deductions to determine how much of a deduction you are entitled to under the law. For instance, you can not begin deducting medical expenses from your income until your expenses exceed 7.5% of your adjusted gross income. If you are self-employed medical insurance premiums you pay a re considered an adjustment to income and not an itemized deduction.
The next item we should mention is your standard deduction. When completing your return before you figure your tax you can reduce your taxable income by the larger of your standard deduction or your itemized deductions. Your standard deduction is a set dollar amount based on your filing status (married, single head of household etc…) For instance this year the standard deductions are:
Married filing Jointly $11,400
Surviving Spouse $11,400
Head of Household $ 8,400
Unmarried $ 5,700
Married filing Separate $ 5,700
Additional amounts are allowed if you are blind or over the age of 65 ($1,100 each instance).
Several years ago the IRS decided they wanted to reduce the number of taxpayers who itemize. They did this by excluding medical expenses up to 7.5% of adjusted gross income as mentioned above, excluding the first $100 plus the next 10% of adjusted gross income for casualty losses such as fire or storm damage and also by excluding the first 2% of adjusted gross income from any miscellaneous deductions such as tax preparation costs, union dues, uniforms and investment management expenses just to name a few. Thus for most taxpayers unless you were buying a home (mortgage interest, taxes) or incurred high charitable giving amounts, taking the standard deduction was the best alternative for you.
For most people you can determine whether it is advantageous to itemize or take the standard deduction by simply adding your property taxes, mortgage interest and charitable contributions together and compare that amount to your standard deduction. Some people come very close to having more itemized deductions than the standard deduction. What we suggest is to get the best of both worlds i.e. use the standard one year and itemize the next. You can do this by delaying the payment of your property taxes to January in alternating years. This will double up your property taxes in the year you itemize and then you take the standard in the other years. You end up getting more deductions across both years than you would have otherwise.
Stay tuned as we detail each category of itemized deductions. We may mention an item that you did not know was deductible. As always if you have any questions please give us a call.