Most of our VITA/TCE clients will use the standard deduction for their federal tax return instead of itemizing.
Why?
There are times when someone is forced to itemize, even if it is not in their best interest--see bottom of page to learn more.
Why?
- You have a choice of using the standard deduction to reduce income before income tax is calculated, or itemizing deductions--you can't do both--one or the other.
- In 2018, the standard deduction for a single person under 65 years of age was increased from $6,350 to $12,000.... and for TY2022 it is $12,950. This means, a single person under 65 does not have to pay income tax on their first $12,950 of income (wages, retirement, capital gains, unemployment, etc.). The IRS knows the taxpayer has living expenses, so the first $12,950 is tax free.
- The average household income for our clients is $27,400. In 2022, our clients did not spend $12,950 or more on Real Estate taxes, Mortgage Insurance, and out-of-pocket medical. (see below for complete list of what can be itemized). This is why we use the standard deduction.
There are times when someone is forced to itemize, even if it is not in their best interest--see bottom of page to learn more.
- If the taxpayer has certain expenses that they think are MORE THAN the standard deduction, they can report those on their return. They system will use the better (larger)of the 2 (itemized or standard deduction)-meaning if what is entered is LESS THAN the standard deduction, the system will use the larger standard deduction.
So, what can be claimed on a Schedule A--Itemized deductions?
- A portion of Medical/Dental-- out of pocket co-pays, lab fees, hospital, prescriptions, eye exams, glasses/contacts, x-rays and other tests, insurance policy premiums (not those that get through work with pre-tax dollars), and long-term care policy premiums, etc.
- What portion counts? The amount of expenses paid by client in the tax year that are OVER 7.5% of their adjusted gross income. **Really simple, just enter the total of all out-of-pocket medical expenses and the system calculates the amount allowed automatically
- Also, mileage driven to and from doctors offices and hospitals can be included. (For 2022 the rate is 18 cents a mile)
FYI--*Two different taxpayers called me a few years back--one asked if they remodeled their shower/tub could it be claimed as a medical expense since they no longer physically can get into their tub/shower, they other wanted to know if they installed a jacuzzi because it would help her feel better due to her medical condition. They wanted to know before they made the purchase/expense -- So I had to do some research. *I did ask about their source of income-one had no taxable income at all so it would not benefit her to report on taxes.
For the other: Per IRS PUB 502 (page 5-6) Capital Expenses:
For the other: Per IRS PUB 502 (page 5-6) Capital Expenses:
- You can include in medical expenses amounts you pay for special equipment installed in a home, or for improvements, if their main purpose is medical care for you, your spouse, or your dependent. The cost of permanent improvements that increase the value of your property may be partly included as a medical expense. The cost of the improvement is reduced by the increase in the value of your property. The difference is a medical expense.
- Example: If improvement costs $25,000 and the increase in value of the home is $18,000 then only the difference of $7,000 can be claimed for medical expenses. ($25,000-$18,000=$7,000)
- If the value of your property isn't increased by the improvement, the entire cost is included as a medical expense.
- Certain improvements made to accommodate a home to your disabled condition, or that of your spouse or your dependents who live with you, don't usually increase the value of the home and the cost can be included in full as medical expenses. These improvements include, but aren't limited to, the following items. • Constructing entrance or exit ramps for your home. • Widening doorways at entrances or exits to your home. • Widening or otherwise modifying hallways and interior doorways. • Installing railings, support bars, or other modifications to bathrooms. • Lowering or modifying kitchen cabinets and equipment. • Moving or modifying electrical outlets and fixtures. • Installing porch lifts and other forms of lifts (but elevators generally add value to the house). • Modifying fire alarms, smoke detectors, and other warning systems. • Modifying stairways. • Adding handrails or grab bars anywhere (whether or not in bathrooms). • Modifying hardware on doors. • Modifying areas in front of entrance and exit doorways. • Grading the ground to provide access to the residence.
- Only reasonable costs to accommodate a home to your disabled condition are considered medical care. Additional costs for personal motives, such as for architectural or aesthetic reasons, aren't medical expenses.
- Cost & Upkeep -- amounts you pay for operation and upkeep of a capital asset qualify as medical expenses as long as the main reason for them is medical care. This rule applies even if none or only part of the original cost of the capital asset qualified as a medical care expense.
- Improvements to property rented by a person with a disability. Amounts paid to buy and install special plumbing fixtures for a person with a disability, mainly for medical reasons, in a rented house are medical expenses.
- Example. You have arthritis and a heart condition. You can't climb stairs or get into a bathtub. On the doctor's advice, you install a bathroom with a shower stall on the first floor of your two-story rented house. The landlord didn't pay any of the cost of buying and installing the special plumbing and didn't lower the rent. You can include the entire amount you paid as medical expenses.
- Car-You can include in medical expenses the cost of special hand controls and other special equipment installed in a car for the use of a person with a disability
- Special design. You can include in medical expenses the difference between the cost of a regular car and a car specially designed to hold a wheelchair.
- Special design. You can include in medical expenses the difference between the cost of a regular car and a car specially designed to hold a wheelchair.
Real estate taxes on home & sales tax; the maximum amount of taxes allowed for itemizing $10,000. It is okay to enter all they had, the system will only use $10K.
Mortgage Interest, Points Paid, and Mortgage Insurance Premiums-- Can only claim mortgage interest if the mortgage was used to buy, build, or improve a home. You can not claim mortgage interest if the loan was used for other debt/reasons.
- Note: If some of the mortgage was for the home (say a refinance) and some was for debt consolidation, you can use the % of interest that reflects % of mortgage that was for home.
- Ex: $100,000 mortgage from refinance. $85,000 for home, $15,000 was used to consolidate or payoff debt; therefore 85,000/100,000= 85%; 85% of mortgage interest can be claimed)
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Mortgage Insurance Premiums-- in case you ant to know what it is: (extra information not needed to know)
- Mortgage insurance premium (MIP) is paid by homeowners who take out loans backed by the Federal Housing Administration (FHA).
- FHA-backed lenders use MIPs to protect themselves against higher-risk borrowers who are more likely to default on loans.
- FHA mortgages require every borrower to have mortgage insurance
- If you make a down payment of less than 20% on a conventional Fannie Mae or Freddie Mac mortgage, you'll likely have to pay PMI each month until you build up at least 20% equity in your home.
Charity Donations -- We can enter charity donations of cash, and we can also enter donations of non-cash (goods) of under $500. More than this and it is out of scope for our program.
Charity miles--miles someone drives from home to volunteer position and back home, or if you drive for the charity as a volunteer (2022 charity rate is 14 cents a mile and has been that way for a while).
Charity miles--miles someone drives from home to volunteer position and back home, or if you drive for the charity as a volunteer (2022 charity rate is 14 cents a mile and has been that way for a while).
How can you see if what you entered was worth it?
You can go to the deduction menu--click on compare deductions-- Here you can see the Standard is $14K+ and the itemized was only $10K+, so no. Remember, most of our clients will not itemize (only a few will each year--at our 20 sites and over 7,000 return we probably had around 10 that were able to itemize).
**you can also look at the 1040 or the Schedule A to see if itemizing was beneficial. Remember, the system will use what ever number is larger between the standard and itemized deductions.
You can go to the deduction menu--click on compare deductions-- Here you can see the Standard is $14K+ and the itemized was only $10K+, so no. Remember, most of our clients will not itemize (only a few will each year--at our 20 sites and over 7,000 return we probably had around 10 that were able to itemize).
**you can also look at the 1040 or the Schedule A to see if itemizing was beneficial. Remember, the system will use what ever number is larger between the standard and itemized deductions.
Is there a time when someone IS FORCED TO ITEMIZE? YES.
- A married individual filing as married filing separately whose spouse itemizes deductions. If one spouse itemizes the other is forced to itemize as well.
- Non-resident taxpayers filing 1040NR (except for those from India) are not entitled to a Standard Deduction (1040NR is Out of Scope except for Foreign Student certified volunteers working with Foreign students).