Preface: “You can’t tax business. Business doesn’t pay taxes. It collects taxes.” ―
2021 Tax Planning: Itemized Deductions
There are two choices or standard strategies for deductions on your federal income tax return: 1) you can itemize deductions or 2) use the standard deduction. Maximizing these deduction benefits can optimize your taxes because any tax deduction ultimately reduces the amount of your taxable income.
Firstly, the standard tax deduction amount for federal tax filing purposes varies depending on the taxpayers income, age, and mostly your filing status. The amount is also adjusted annually for inflation. Certain taxpayers cannot use the standard deduction: These include I) A married individual filing separately whose spouse itemizes deductions. II) An individual who files a tax return for a period of less than 12 months because of a change in his or her annual accounting period. III) An individual who was a nonresident alien or a dual-status alien during the year. However, nonresident aliens who are married to a U.S. citizen or resident alien at the end of the year and who choose to be treated as U.S. residents for tax purposes can take the standard deduction.
The standard deduction for 2021 rises to $25,100 and increase of $300 from 220. For single and married filing separately taxpayers the standard deduction is $12,550 for 2021, up $150 from 2020. For heads of households the standard deduction is $18,800 for 2021.
The standard tax deduction is automatically available to any taxpayer and adjusted per filing status.
Secondly, Itemized deductions are a Form 1040 Schedule A deductions. This includes amounts paid for state and local income or sales taxes, real estate taxes, personal property taxes, or qualifying mortgage interest. Additionally, you may also include gifts to charity and part of the amount you paid for medical and dental expenses. You would usually benefit by itemizing on your tax filing if you:
-
-
-
-
- Cannot use the standard deduction or the amount you can claim is limited;
- Paid Uninsured medical and dental expenses;
- Paid substantial interest or taxes on your home or a second home;
- Paid Investment Interest;
- Paid unreimbursed employee expenses;
- Made large charitable contributions to qualified charities.
-
-
-
The higher standard deduction under recent tax reform measures has led to fewer taxpayers itemizing their tax deductions currently and simpler tax filings. However, taxpayers may have an opportunity to itemize this year by keeping these tips in mind:
The deduction that taxpayers can claim for state and local income, sales and property taxes is limited. This deduction is limited to a combined, total deduction of $10,000. It is $5,000 if married filing separately. Any state and local taxes paid above this amount can’t be deducted.The deduction for mortgage interest is also limited to interest paid on a loan secured by the taxpayer’s main home or second home.
For homeowners who choose to refinance, they must use the loan to buy, build, or substantially improve their main home or second home, and the mortgage interest they may deduct is subject to the limits described as following when buying a home.Taxpayers who buy a new home this year can only deduct mortgage interest they pay on a total of $750,000 in qualifying debt for a first and second home ($375,000 if married filing separately).
For existing mortgages, if the loan originated on or before December 15, 2017, taxpayers continue to deduct interest on a total of $1 million in qualifying debt secured by first and second homes.
Many taxpayers often find unused items in good condition they can donate to a qualified charity and receive an itemized deduction benefit on Schedule A. These donations may qualify for a tax deduction. For some taxpayers, checks, credit card, or other money gifts is the preferred donation medium. For any donation whether items or money taxpayers must have proof of all cash and non-cash donations for itemizing.
Driving a personal vehicle while donating services on a trip sponsored by a qualified charity could qualify for a tax break. Itemizers can deduct 14 cents per mile for charitable mileage driven in 2021.
With itemized tax deductions you need to keep receipts on file, and with standard deduction their no extra effort to document the tax deduction. Generally, if itemized tax expenses exceed your standard tax deduction it is a good idea to itemize your taxes.
This year, when tax planning for 2021 be certain to discuss with your tax advisor the tax benefits of either itemizing taxes or stream-lining your 2021 tax filing with a standard deduction.