Benefits of Itemized Deductions
If you itemized deductions instead of taking the standard deduction, you may be able to save more money on your taxes. This is because itemized deductions allow you to deduct certain expenses that aren’t covered by the standard deduction. For example, if you spent a significant amount of money for home improvements, or if you bought or refinanced a home during the year, those costs are deductible only if you itemize your deductions.
Here are some benefits of itemized deductions:
Deducting State and Local Income, Sales, and Property Taxes
Taxpayers are allowed to deduct income taxes they have paid to the state and their municipality, but the combined total of deductions cannot exceed $10,000 if married and filing jointly, $5,000 if married filing separately.
Buying a home
Starting in 2021, taxpayers who bought a new home may deduct mortgage interest for a total of $750,000 ($375,000 for married filing separately) on qualified debt for a first and second home. For mortgages with an original principal balance of $1 million or more that were taken out before December 15, 2017, the limit remains at $1 million.
Refinanced home
The mortgage interest deduction is limited to interest paid on a loan secured by the taxpayer’s main home or second home. If homeowners refinance, they may deduct only the interest paid on the amount of the loan used to improve their main or second home, but not any other amounts.
Donations
Making a charitable donation is one of the ways in which taxpayers can reduce their tax burden. To take advantage of this deduction, donate to a qualifying 501(c)(3) public charity or private foundation. Remember that non-cash donations may require that you have a qualified appraisal done to substantiate your deduction. You must be able to provide proof of all donations.
Investment Interest Expense
Investment interest expense is interest paid or accrued on a loan or part of a loan that is allocated to income from taxable investments, such as interest on a loan you took out to buy stock in a brokerage account.
Bottom line
Opting for a Standard Deduction is easier for most taxpayers so they choose it over Itemized Deduction. However, what most people don’t know is that using Itemized Deduction opens up a ton of tax break opportunities for you to take advantage of! But be careful, you must have an ample amount of tax know-how to properly itemize your deductions. A simple mistake might lead to hefty fines and penalties. If the thought of these tax break opportunities pique your interest but you don’t know how to itemize your deductions, well worry no more! Simply send us a message and let our expert Enrolled Agent do your taxes for you!
