Tax Planning Can Save You Money

Planning ahead for tax season is always a good idea, and one of the most essential elements is keeping good records. Many people are uncertain as to whether they should simply take the standard deduction that’s allowed or whether they are eligible for itemizing tax-deductible expenditures, and the answer is important: if you’re going to itemize, you need to keep close track of your tax-deductible expenses.

The answer to this question depends on a number of things, but the most important factor is how much you actually spent on items that are tax deductible during the year. Tax-deductible items include taxes, mortgage interest, medical expenses and charitable contributions, as well as casualty losses and other miscellaneous deductions for things like investment or job-relate expenses.

If your tax-deductible expenses add up to an amount high enough to be itemized, it can significantly lower your taxes, and the best way to determine whether you are spending enough to be eligible to use them is to know what the standard deduction for your filing status is. If you are spending more on tax-deductible expenses than the standard deduction amount, then it is likely that itemizing will provide you with a tax advantage.

Your filing status is determined by whether you are single or married, and if married whether you and your spouse are choosing to file your taxes together or not. There are other variables that can impact your standard deduction, including blindness and status as a senior citizen. For tax year 2015, the standard deductions are as follows:

Single                                                 $6,300
Married Filing Jointly*                         $12,600
Head of Household                             $9,250
Married Filing Separately                    $6,300

Those who are 65 or older or who are blind** can take the following additional amounts:

Married taxpayers filing jointly          $1,250
Others                                               $1,550

*This amount is also applicable to qualifying widows/widowers who have a dependent child and whose spouse died in 2013 or 2014.

**Taxpayers who are blind and over the age of 65 can take two extra amounts.

Though the standard deduction amounts shown above apply to most taxpayers, they don’t apply to all of them. Some individuals are not eligible to take the standard deduction based upon their income or other factors, including:

  • Those who are subject to the Alternative Minimum Tax (AMT)
  • Married taxpayers who file their taxes separately. This is to prevent one spouse from taking the standard deduction, leaving the other to claim all of the couple’s itemized deductions. Both spouses are required to either itemize or claim the standard deduction.
  • Nonresident aliens, dual-status aliens, and taxpayers whose returns are filed for periods of less than one year are not eligible to take the standard deduction.

In addition to these restrictions and limitations, not all deductions are treated the same way, and that means that when you are comparing your expenses against the standard deduction to see whether to itemize or not, you need to understand the variables that are involved. Here are some of the different ways that different expenses are treated:

Taxes – Though you are able to deduct the taxes you pay on state income, sales tax and real property tax no matter how much money you make, if you are subject to the ATM they are not deductible. Taking tax deductions may end up leading to the AMT being imposed.

Charitable Contributions – Deductions for contributions to make to charitable organizations are limited to half of your adjusted gross income (AGI), and some non-cash contributions are subject to lower income limits. Charitable contributions can be deducted in the same way regardless of whether the taxpayer is subject to the AMT or not.

Medical Expenses – In order to deduct your medical expenses, they must total more than 10% of your adjusted gross income (AGI). If you are 65 or older, this threshold is reduced to 7.5 percent.

Interest – Home mortgage interest and investment interest are both tax deductible, but certain limits are imposed. For home mortgage interest, taxpayers are limited to deducting interest on up to $1 million of their acquisition debt, and on the interest of up to $100,000 of the debt on their equity.  For those who are subject to the AMT, equity debt is not deductible, regardless of whether it was used to purchase a vehicle, boat, motor home, or anything else.

In addition to having to understand these limitations, taxpayers also are faced with additional complications. For example, on all tax-deductible expenses other than medical and dental expenses, casualty and theft losses, gambling losses and investment interest, high income taxpayers have to determine whether their adjusted gross income exceeds a threshold based on their filing status to see if they can itemize. These thresholds are:

Married couple filing jointly or qualifying widow(er) - $309,900

Single taxpayer - $258,250

Head of household - $284,050

Married filing separate - $154,950

Being able to itemize deductions can provide a big benefit for taxpayers, but the various rules that the government have imposed make it difficult to determine eligibility. For this reason, it is essential that you keep records of all expenses that may qualify for an itemized deduction so that come tax time, you can tally everything up and determine what is best.

It is also a good idea to look at your decision from previous years to see if you might have been eligible to itemize.

Do you need tax planning help?

Give us a call at 786-363-0233 for a consultation!