How To Determine if You Should Take Itemized Deductions for the Tax Year

2020 has been a rough year for most people regarding personal finance. With unemployment, stimulus checks, and the new tax plan, it can be difficult to know how to properly file your taxes. One important part of filing your taxes is tax deductions. A tax deduction is a deduction that lowers the amount of taxes you have to pay by reducing your taxable income. There are two overarching types of tax deductions, the standard deduction and itemized deductions. You can take one or the other, but which one should you take? In this article, I’ll be going over the differences between each and how you can determine if you should take itemized deductions for the 2021 tax year.

Standard Deductions vs. Itemized Deductions

The standard deduction is a set amount of money that reduces your taxable income. The amount was nearly doubled in 2018 with the Tax Cuts and Jobs Act. The standard deduction varies year by year but is as follows for the 2020 and 2021 tax year.

The standard deduction is simple. Everyone who files a tax return is eligible and there is no documentation required. However, if you are a 1099 independent contractor or have a variety of other expenses, itemized deductions may save you even more in your taxable income.

Itemized deductions consist of you gathering a range of expenses you incurred during that particular tax year. If you choose to take itemized deductions, you will need to keep receipts and documentation for the items you choose to expense.

What Can I Itemize?

There is an endless list of items you can take itemized deductions for. Here are some of the common ones:

• Interest expenses, including mortgage and student loan interest.
• Charitable donations.
• Medical expenses.
• Property tax.
• Disaster losses in a federally declared disaster area.

If you have a lot of these expenses, you should definitely take itemized deductions to save more on your taxes.

It’s important to understand that itemized deductions are separate from self employment expenses. Self employment expenses are filed with a Schedule C while itemized deductions are filed with Schedule A of Form 1040. You can take itemized deductions and file self employment expenses for the same tax return and both will reduce your taxable income.

Tax Cuts and Jobs Act

In 2018, the Tax Cuts and Jobs Act was passed by President Trump. This, in short, reduced corporate tax rates from 35% to 21% permanently and nearly doubled the standard deduction that taxpayers could take from 2018 to 2025. This will make it so that there will be a significantly lower number of people taking itemized deductions.

Changed Exemptions

There are a variety of changed exemptions since the Tax Cuts and Jobs Act was passed. These are just some of the major changes that have come into play. Most will be reverted after 2025.

• Personal exemption (which was $4150) was removed.
• Child tax credit is now $2000 in 2020 for children under 17. In 2021, it’s $3000 for children under 18 and $3600 for children under 6. The credit is refundable to the taxpayer if it exceeds the amount of tax owed.
• Total state and local tax deductions are limited at $10,000 through 2025.
• Mortgage interest deduction is limited to $750,000 for properties bought on December 15, 2017 and later. This was $1 million under previous rules.
• Deductions from moving expenses, home office expenses, union dues, and other miscellaneous expenses are not eligible to be deducted.
• Alimony payments are no longer deductible. This change is permanent.

Conclusion

For the vast majority of people, the standard deduction will be the better option, especially up until 2025 because of the increased standard deduction rate. However, if you have multiple children, a mortgage, high medical expenses, and/or other eligible deductions, it may be favorable to take itemized deductions. If you think you fall in this category, make sure you’re keeping good documentation of your expenses.

As a reminder, tax day is April 15th this year in 2022. Check out TurboTax here for the easiest and cheapest way to file your own tax returns.

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