Financial Focus: The Path to a Bigger Tax Refund for 2021 – 2022 Itemized Deductions (Part 3 of 7)

Professor Anthony Rivieccio

While the majority of Americans probably may not be eligible to itemize, I encourage you to give yourself what I call the “Itemized Deductions” test: Add up all the sections below and if that number is higher than your standard deduction then itemize, itemize, itemize, with Form Schedule A.

First, understand all taxpayers, based on filing status, get a no-questions-nor-receipts asked, automatic standard deduction.

According to the IRS, “for tax year 2020, the standard deduction amounts will increase over $12,200 for individuals, $18,350 for heads of household, and $24,400 for married couples filing jointly and surviving spouses. For 2020, the additional standard deduction amount for the aged or the blind is over $1,300.

So, if you’re single, for example, you can just take an automatic $12,000 deduction or add up ALL of your itemized deductions. If you are eligible to itemize then that “bigger number” will bring you your “tax bracket percentage” back in your tax refund. For most Americans, that could be up to 40 cents to the dollar deduction, looking at federal and state taxes.

Itemized Deductions

Itemized Deductions consist of mortgage interest, property taxes, mortgage insurance, charitable contributions, medical expenses, state and local taxes, general sales tax, investment interest, casualty losses, gambling losses, and other miscellaneous expenses.

In recent years the IRS is trying to encourage more taxpayers to take the standard deduction versus itemizing. Again, we strongly recommend that you give yourself the itemized deductions test.

Medical Expenses

According to the IRS, “You can include medical expenses and copayments for you, your spouse, and your dependents. You can only deduct the part of your expenses that exceed 7.5 percent of your adjusted gross income.” Some examples of medical expenses with deductibility power include:

Abortions

Acupuncture

Alcoholism treatment

Ambulance costs

Birth control pills

Child birth classes

Chiropractors

Contact lenses

Crutches

Dentist

Dentures

Doctor fees

Drug addiction treatment

Prescription drugs

Dyslexia reading programs and tutors

Eye examination and glasses

Guide dogs

Health insurance

Hearing aids

Hospital bills

Insulin

Laboratory fees

Long-term care insurance

Nursing home if for medical treatment

Optometrist

Osteopath

Physical therapy

Psychiatrist

Psychologist

Travel to medical clinics

Vasectomy

Wheelchair

This list does not contain every medical deduction available. For more information regarding deductible medical expenses, go to the IRS website or Publication 17.

State and Local Income Taxes

Your state and local tax withheld on your W-2 or 1099-R will flow automatically to Schedule A.

State and local income taxes are deductible on Schedule A as itemized deductions for the year the taxes are paid.

So, in simple terms, looks at your W-2. If you live in a high tax state like New York, do not be surprised if you make, let’s say, $50,000 in 2020, that the New York State tax bite would be around $5,000 or more.

Tip: Now notice, that’s $5,000 of the $12,000 threshold (using the same single filer approach), which means if the other deductibles go over $7000, then bingo, you can itemize and get 40 cents to the dollar back.

Charitable Contributions

A contribution is deductible if it is made to a qualified organization, such as a church or charitable organization like the United Way or Goodwill Industries.

Any unreimbursed out-of-pocket expenses for volunteer work for a qualified organization are deductible. Examples of out-of-pocket expenses include office supplies, uniforms, gasoline, or long-distance phone calls spent while doing volunteer work for a charity. You can either deduct your actual volunteer automobile expenses or you can use a standard mileage rate to calculate your automobile expenses based on miles driven. The standard mileage rate for volunteer work for a charity is 14 cents per mile.

If you donate property such as clothing or used appliances to a charity such as Goodwill Industries, you can deduct the fair market value (FMV) of the property donated. FMV is the price you would have received if you had sold the property instead of donating it. If you donated more than $500 of property, you will need to enter information about the donation on Form 8283.

It’s important to keep good records of your donations. For donations below $250, a canceled check, bank record, credit card record, or a receipt from the charity is proof that you made the donation. For donations of $250 or more, you need a receipt from the charity.

Tip: I encourage my clients very simply when they clean their home for seasonal cleaning to simply donate property (from clothing to a car). Remember, as stated above, the FMV method.

Job Expenses

The Tax Cuts and Jobs Act changed the job expenses deduction to only apply to certain types of employees.

Some common employee expenses that can be deducted (if you weren’t reimbursed for them) include:

Union dues

Certain job search expenses

Vehicle expenses

Miles driven (other than commuting)

Business meals

Overnight travel

Home office

Uniforms

Business gifts

Small tools

Parking fees

National Guard expenses

You may also be able to deduct:

Professional dues

Safety shoes

Safety glasses

Protective clothing

Business cards

Licenses

Trade magazines and subscriptions

Meals (50 percent is nondeductible)

Briefcase

Office decorations

Office supplies

Expenses related to temporary out-of-town job assignments

Certain education expenses

Malpractice insurance

Any other expense that relates to your job

NOW GET READY FOR THE BAD NEWS (BUT GOOD FOR OTHERS):

What employees qualify for the job expense deduction?

The Tax Cuts and Jobs Act changes: Beginning in 2018, the job expense deduction is only available to certain types of employees. The employees that qualify to deduct unreimbursed job expenses are:

U.S. Armed Forces reservists

Qualified performing artists

Fee-based state or local government officials

Employees with impairment-related work expenses

Mortgage Interest

According to the IRS, interest is deductible on a loan(s) of up to $750,000 ($375,000 if married and filing separately) used to acquire, construct, or improve your principal residence and a second residence. The tax deduction is taken on Schedule A as an itemized deduction. Your primary home or second home can be a house, condo, RV, boat, or camper as long as it has cooking, toilet, and sleeping facilities.

To deduct mortgage interest or home equity interest, the loan must be secured by your main home or second home.

If you own a rental home or investment home, you can deduct the mortgage interest for that home as part of the rental home expenses or as investment interest even if it is a third home or more.

Mortgage interest on a home construction loan is deductible from the time construction begins. If construction of your home takes longer than 24 months, then any mortgage interest after 24 months is no longer deductible until your home is completed.

If you are an unmarried co-owner of a residence, the $750,000 ($375,000) limit applies to each taxpayer separately.

Property and Real Estate Taxes

Property and real estate taxes, included as part of your state taxes, are deductible. You will find these numbers on Form 1098.

Next week, under Part 4, we will cover the world of Small Business, Self-Employment & Home office

Professor Anthony Rivieccio, MBA PFA, is a recognized financial expert since 1986, and has been featured by many national and local media including: Kiplinger’s Personal Finance, The New York Post, News 12 The Bronx, Bloomberg News Radio, BronxNet Television, the Norwood News, The West Side Manhattan Gazette, Labor Press Magazine, Financial Planning Magazine, WINS 1010 Radio, The Co-Op City News, The Bronx News, thisisthebronX.info and The Bronx Chronicle.