Hi friend—
In this Tax Basics Series email we are going to be covering Standard and Itemized Deductions, how they work, and what they mean for you. Tax deductions in general are available as a way to lower your taxable income.
Tax Deductions
There are two options when you file your return:
- To claim the overall standard deduction which is a fixed rate that is determined by the IRS based on filing status
- To itemize your total deductions which means to itemize all your expenses such as medical, charitable donations, interest rates, and etc.
Standard Deduction
Taking the Standard Deduction is a simpler way of preparing your tax return. Instead of entering specific amounts for each category of expenses, you are choosing to take the standard deduction rate provided by the IRS based on your filing status:
- $12,550 for taxpayers filing under the Single
- $18,800 for taxpayers filing HOH
- $25,100 for taxpayers filing MFJ or QW
Itemized Deduction
It's true, you can deduct all your out of pocket medical expenses. You know, the co-pays, premiums on insurance, prescriptions, medical equipment, and more. Those taxes you paid into your home state and local government for property, personal property, income tax and sales tax. That beautiful home you bought? Yep, you can itemized your mortgage interest on your return too. Also, the charitable donations you gave can be added to the list as well.
However, there are a few qualification tests before the deductions count towards your income.
1. Let's talk medical expense deductions: In order for the medical expenses to qualify for the deduction, the expense amount must exceed 7.5% of your AGI.
2. Now onto State and Local taxes: Your state and local tax deduction is limited to $10,000. The amount of taxes you paid can be less or equal to, but it cannot exceed the $10,000 limit put in place by the IRS.
3. About that dream home of yours: The tax deduction can only be applied to the mortgage interest of your primary residence (and one vacation home). There is a limit of interest paid on up to $750,000 of debt ($375,000 if MFJ) acquired after December 2017. Deduction limits are higher for debt acquired before December 2017.
- Home Equity Loans: Deductible only if used to purchase, build, or renovate to improve your home.
- Mortgage insurance premiums (ends 2021)
We will back for more Tax Basics soon! In the meantime, if you have any questions regarding the deduction route that's best for your individual tax situation, give us a call!
Speak soon, friend!
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