Financial Focus | Tax Season 2021 — Itemized deductions or the Big Bird $50 discount on the corner?
By Professor Anthony Rivieccio MBA PFA
The world of Itemized deductions is certainly a comprehensive subject but Donald Trump, in his scream for tax simplification in 2017, said ” forget itemized deductions, just take the standard deduction”—- and wholla today, 90% of Americans take the Standard Deduction– and lose more of getting their tax money back every year in doing so.
Let’s first understand the world of personal deductions:
- Medical Expenses
- State & City Taxes you pay
- Home Mortgage
- Charity
- Misc Deductions
In ugly legal terms it means:
The standard deduction is the portion of income not subject to tax that can be used to reduce your tax bill. The IRS adjusts the standard deduction each year for inflation. The amount of your standard deduction is based on your filing status, age, and other criteria. The standard deduction in 2021 was $12,550 for anyone who is single or married but filing separately; $25,100 for anyone who is married and filing jointly, as well as for surviving spouses; and it is $18,800 for the head of household.
So , just to understand the logic for a moment , let’s pretend Robert is single, 50 years old, a newspaper reporter, making the NY average of $60,000 a year. He is in a Federal State City tax bracket of 40%,( State & City 15%). The above items are his eligible itemized deductions.
Now what everyone including Robert has to figure out ( using this example) is: Do I take my standard deduction or Itemize my deductions? Why is this question so important to answer? Because ANY AMOUNT OVER your standard deduction, you get your tax bracket equivalent back , in your tax savings. So, in simple terms, every $1 over the standard, based on the example above, Robert could be eligible for 40 cents in tax savings back– for every $1 he overpaid .
Now this is where dlligent tax planning comes into play. One has to understand the comprehensivness of the items above. Then you must keep adequate bookkeeping. Then you must provide this information to your tax professional. Sounds like a process: Yes it is! And this is the main reason why people don’t keep track and just give up completely.
But I’ll share a secret that should tell you why you may ( or may not) want to look at this more deeply- and your employer has done all the bookkeeping for you: Your W-2 and the State & City taxes you paid.
Robert making $60k means he could have paid (15%) $9,000 in State taxe. All he has to do is look at his W-2 to see that number. According to above chart , his standard deduction is $12,550. After subtraction, this means all he has to find is $3,550 in personal deductible spending left, on the items above to decide whether to itemize or not. My guess, is that with further probing, it would probably be in Roberts interest to learn his itemized deductions. Wait a minute, Robert , for example, had to pay $10,000 for medical expenses?.
That would mean Robert ( at this point) would itemize as he would be $6,450 OVER his standard deduction mark. The tax savings (40%) would be $2,580. And now the best part, the amount in your refund (x .40%) will be $1,032 EXTRA.
This is money Robert would have lost if he did not itemize. If we look further into the items above, upon good tax planning probing we could either I’m sure, find more items of deductibility for past and even more important, deductiblities for future years. But alas, Robert met the ABC bird man on the corner, grabbed the infamous $50 discount card, and ran into the local ABC store to get his taxes done quickly , cheaper, and in a non itemized Deductible way.
And all Robert had to do from the beginning, to decide the right tax processing move in his life , was simply look at his State & City taxes paid. In high tax States, like NY, this will be the determining factor whether one should know how and whether to itemize or not.
So, what should be most important this time of year is not tax preparation, but future tax planning. Learn your eligible itemized deductions and consider tracking them. Sit with your tax representative and tell them you want to learn more.
In our new Facebook Personal Finance Encyclopedia, On February 12th, 6PM, Financial Focus Digital, we will be holding a Saturday webinar on this subject more specifically. It is FREE and all our welcome . Just go to FB search and look up ” Financial Focus Digital”.
If you see Big Bird, ask them if their suit is tax deductible ( the answer will be no)?. If they say they don’t know ( that should tell you everything) then , just give them there discount card back and just mention to use the $50 for dry cleaning .
Professor Anthony Rivieccio, MBA PFA, is the founder of The Financial Advisors Group, celebrating its 25th year as a full service investment planning & management firm . Anthony is also owner of Rivieccio Financial Advisors, a virtual only financial planning & advisory firm, opened in 2021.
Mr. Rivieccio, a recognized financial expert since 1986, 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 New York Parrot, The Bronx News, thisisthebronX.info , The Bronx Chronicle & The Parkchester Times. Mr. Rivieccio also pens a financial article called “Money Talk”.
Anthony is also currently an Adjunct Professor of Business, Finance & Accounting for both, City University of New York & Monroe College, a Private University.
For financial assistance, Anthony can be reached at (347) 575-5045. Have Facebook? My email is a_rivieccio@yahoo.com My personal page is www.facebook.com/anthonyfromthebronx