Maximizing one’s 1040 refund or – less preferably – minimizing one’s tax liability are universal goals for folks filing their annual returns. Not surprisingly, some of the most asked questions that we receive are about what can be written off and what the actual tax benefits are of doing so.
First, itemized deductions are only useful if the sum total is greater than the applicable standard deduction ($6,300 for a single person, $12,600 for a married couple) since only the greater of the two is used against a taxpayer’s Adjusted Gross Income (AGI). If these thresholds are not surpassed, then there is no actual tax benefit in itemizing.
Many people know about the typical itemized deductions: mortgage interest, real estate taxes, and charitable contributions among the most common. But there are certain aspects of itemizing that can be confusing and are often misunderstood.
- Medical and Dental Expenses
Technically, deductions can be taken for out-of-pocket medical and dental expenses, but only for those expenses that exceed the floor for this category. This floor is 10% of AGI for those under 65 years old and 7.5% for anyone older. In many cases, this threshold makes the exercise of calculating these amounts a useless one. For example, if a 50 year old taxpayer’s AGI is $100,000, only expenses beyond $10,000 would be deductible on Schedule A.
- Sales Taxes
Like medical and dental expenses, technically sales taxes are potentially deductible on Schedule A. When people hear about this, they assume that the 6% PA sales tax on the new car they just purchased will be helpful. Possibly, but for itemizing state and local taxes, sales taxes are compared against one’s state and local income taxes, and only the greater of the two is used. Unless someone lives in a tax-free state (we see you, Floridians), the vast majority of taxpayers easily pay quite a bit more in state and local income taxes over sales taxes.
- Unreimbursed Employee Expenses
This is another category in which an AGI floor must be surpassed before any deductions can actually be taken. For employees (i.e. not self-employed) who must pay ordinary and necessary expenses out of pocket, the amount becomes deductible only when the sum total is greater than 2% of AGI. Regardless of this limitation, it would behoove a taxpayer to report this information because some states (including Pennsylvania) allow these expenses as a deduction without the floor.
If you have any questions about your ability to itemize or what the tax benefits really are for your situation, please do not hesitate to reach out and contact us.