Do you itemize your tax deductions?
This is a topic many people find confusing.
Here is how it works.
The government lets you earn a certain amount of income tax-free. (I know, isn’t the IRS awesome?)
Well, you have a choice.
You can either take The Standard Deduction OR you can choose to Itemize Your Deductions.
Naturally, you are going to pick whichever one offers you the most tax-free income.
Let’s break it down:
1) The Standard Deduction – This is a set amount of tax-free income the IRS is willing to give to you, based upon your filing status.
For example, in 2022, if you file as married filing jointly, you can earn $25,100 of income tax-free.
2) Itemize Your Deductions – This is when you choose to deduct a number of expenses allowed by the IRS.
What kinds of expenses does the IRS allow you to deduct if you choose to itemize?
The IRS has a form for this (called Schedule A), but from my experience, the three most common ones people use are mortgage interest, local taxes (including property) and charity.
The concept is fairly simple.
Let’s say you’re filing as married filing jointly, and your mortgage interest, local taxes and charity total $26,000 – you would likely choose to itemize your tax deductions since $26,000 is greater than $25,100 (your standard deduction).
There are certain laws that apply (such as local tax being limited to $10,000), but that is the basic idea behind the standard vs. itemized discussion.