Wading through piecemeal deductions at tax time is no easy task.
On one hand, knowing what you can write off and what form to fill out sometimes requires a lot of research and foresight. On the other, intelligent taxpayers who have the proper documentation can unlock big-time deductions.
But before you start digging through the tax code, there’s an important question to ask: Should you even bother?
You see, most taxpayers have a very hard time claiming beyond the “standard deduction.” This is the minimum amount that the Internal Revenue Service allows everyone to reduce their taxable income by each year. According to the IRS, roughly two-thirds of all taxpayers take the standard deduction rather than itemizing.
For tax year 2012, the standard deductions are:
- $11,900 for married couples filing jointly
- $5,950 for individuals or couples filing separately
- $8,700 for heads of a household
As you can see, without a major tax deduction such as mortgage interest or big medical bills, it’s hard to break those thresholds. A handful of prescriptions and a few hundred bucks in charitable giving doesn’t even get you close.
In short, if you can’t tally up more than these amounts in deductions, don’t bother to itemize.
Of course there are a few common circumstances that can put taxpayers over the top. These include:
- Health issues: Big-time medical bills that you have to pay out-of-pocket. If you had serious health issues or didn’t have insurance in 2012, you could easily top the standard deduction. Check this list of qualified expenses at the IRS for more information.
- Children: That little bundle of joy doesn’t come cheap. But thankfully, those antibiotics for ear infections are deductible under the medical breaks listed above. And childcare for infants is deductible too, as is part the college tuition you will dole out later. Beyond deductions there are also credits you may be qualified for based on circumstance — so if you have kids, it’s worth digging into the tax code to see what you can claim.
- Homeownership: The mortgage interest deduction may put you over the top just by itself, especially if you recently purchased a house and most of your payments are short on principal and mostly interest. You can also deduct local and state property taxes on federal returns, and some qualified items covered under residential energy efficiency breaks.
If you’re in the ballpark of the standard deduction because of circumstances like these, it may be worth gathering your receipts and talking to a tax professional. After all, tax preparation is tax-deductible … so if you know you can itemize, you can tap the knowledge of a certified public accountant and then simply add that to your return along with whatever else they can find.
One final note: There are a few circumstances where you cannot use the standard deduction even if you’re under the IRS threshold. These situations include:
- filing separately from your spouse when your spouse itemizes deductions;
- filing a tax return for a period of less than 12 months because of a change in accounting methods; or
- you are a nonresident alien or a dual-status alien during the tax year.
For more information on the difference between itemized deductions and the standard deduction, refer to the Form 1040 Instructions, or Publication 17 on IRS.gov which explains “Your Federal Income Tax.”
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks.