Want a $27,447 Tax Deduction? Find Out if You Can Do This
One key question every taxpayer faces is whether to itemize or take the standard deduction. No one likes to spend a ton of time on their tax returns, and that makes it tempting not to take full advantage of certain time-consuming tax strategies, even if they'd save you money. It's easy to take the standard deduction, especially when you consider the time you have to take to gather records and calculate how much you can itemize. But for the average American taxpayer who doesitemize, the benefits of itemizing greatly exceed the standard deduction.
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Should You Itemize?
If you can get a bigger deduction using the standard deduction than you can by itemizing, then taking the standard deduction generally makes the most sense. The amounts that you can take as a standard deduction when preparing your 2016 tax returns are listed in the table below.
Source: IRS.
The standard deduction is much more popular than itemizing. Out of about 147 million total returns in the most recent year for which IRS data are available, almost 103 million claimed the standard deduction. Those deduction amounts added up to $876 billion, and that worked out to an average of $8,541 for every return that took the standard deduction.
However, those who itemized got much larger deductions. The roughly 44 million taxpayers who itemized deducted a total of more than $1.2 trillion, amounting to an average of $27,447 per taxpayer.
What Were the Most Common Itemized Deductions?
When you look at the most frequently used itemized deductions, they generally fall into three categories. The most popular category is state and local taxes. Under current law, you're allowed to itemize state and local income taxes or sales taxes, making the deduction available to anyone who lives in a state that imposes at least one of those taxes. Among all those who itemized, more than 95% claimed a deduction for state and local income or sales tax, and the amount was sizable, averaging $7,769 per return.
Itemized deductions related to home ownership are also popular -- and often highly valuable. State and local real-estate taxes can be itemized, and 84% of itemizers claimed that deduction. Home mortgage interest and mortgage insurance premiums benefited more than 32 million taxpayers. When you add up about $294 billion in mortgage-related deductions and $181 billion in real-estate taxes, the average deduction for those who claimed them was roughly $12,723.
Charitable gifts were the third-most popular itemized deduction. About 36.2 million people made deductible contributions totaling more than $210 billion, and that added up to an average deduction of $5,814 per return.
It's important to note that there are other kinds of expenses that you can itemize. For instance, few people have large enough medical expenses to claim any as itemized deductions, because the amount you spend on such expenses has to exceed 7.5% to 10% of your adjusted gross income before you can include even a single dollar on your return. Similarly, the thresholds for deducting theft or casualty losses, as well as miscellaneous expenses, often keep taxpayers from claiming those deductions.
Don't Miss Your Deductions
When faced with the time involved in itemizing, many taxpayers figure it's not even worth looking into. But it's relatively easy to do a quick spot-check in the three major items listed above to decide whether itemizing is worth it. Once you start, you'll have an even bigger incentive to think about taxes in structuring your future financial affairs.
Itemizing deductions can be a hassle. But given how much it can save you in taxes, taking just a few moments to see how much itemizing could help you is well worth it.
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