How To Maximize Your Deductions
of taking a standard deduction or itemizing your deductions. The first step is knowing what your standard
deduction would be to see if it makes sense for you to itemize. If your everyday expenses are not going to exceed
the standard amount there is no point in looking deeper into itemizing your deductions. For 2020 tax year
depending on your filing status your standard deduction will be the following:
Filing Status & 2020 Standard Deduction
Married Filing Jointly: $24,800
Married Filing Separately: $12,400
Head of Household: $18,650
There are many expenses that can be itemized on your tax return resulting in lowering your taxable income. The IRS allows medical expenses, sales tax, property tax, and certain interest expenses to be an itemized deduction.
If you had any out of pocket health care costs in this tax year you may qualify to use those expenses as an itemized deduction from taxable income. Medical expenses are only deductible if the total exceeds 7.5% of your adjusted gross income (AGI). For example, if your AGI is $75,000 your medical expenses must exceed $5,625 to qualify as a deduction.
There are several taxes that you can deduct on your federal tax return, such as state and local sales tax, property taxes, and state income tax. We all make everyday essential purchases we pay sales tax on, it is recommended to keep all your receipts to use as a sales tax deduction. Don’t worry you are not the only who is not keeping up will your daily receipts, there is a sales tax calculator that will calculate an estimated amount of sales tax paid based off your residence and annual income.
If you own a home you can claim your property taxes paid as an itemized deduction. Keep in mind the total amount claimed for sales tax, property, and income tax is capped at $10,000. Although if you are filing a Schedule C there is not a limit on the total property taxes claimed.
If you are a home owner you should receive a 1098 from your mortgage company reporting all interest paid on your mortgage, this total amount can be deducted. Also, if you are/ were a student with student loans, any interest paid on your student loans can be deducted as well. If you have deferred your student loans, they are still accumulating interest, I advise you to see what interest has accumulated over the year and pay as much as you can before year end and take that amount as a deduction. Keep in mind you are only allowed to deduct up to $2,500 for the loan interest paid during the year. If you are able to itemize your deductions, this will help you maximize your deductions minimize your debt.
For tax year 2020, the limit individuals can deduct has been increased to 100% of your AGI. If you are a small business and you donated goods, inventory, or cash to qualifying charities keep good records of all your donations so you can maximize your deductions this year. Another rule of thumb individuals should keep in mind: try to bunch some of your itemized deductions in one year if possible to capitalize on the value. Instead of making clothing donations annually, take advantage of itemizing by building up your expenses in one taxable year. More than likely you won’t exceed the standard deduction every year but if planned appropriately you may be able to itemize every other or every two years.
If you intend to itemize in any given year it makes sense to generate as much spending as possible in the above categories to maximize the effect. You may hold off on certain transactions, to make those purchases and donations during the year in which you itemize. I do not recommend individuals to spend just to generate a deduction but for instance, if you hold off on your clothing donations for a couple of years to maximize the deduction effect, plus you have medical treatments that have been delayed go forward with those procedures and donations in the same year. This type of strategizing will make itemizing most effective. There are other expenses and losses that can be used to lower taxable income, contact us to schedule a personalized tax planning session so you can make the best decisions for your tax position.
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