2021 Individual Tax Planning: Itemized Deductions

Preface: If I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction and cash flow. – Jack Welch

2021 Individual Tax Planning: Itemized Deductions

There are two approaches you can take deductions on your individual federal income tax return: a) you can itemize tax deductions or b) use the standard tax deduction. Tax deductions reduce the amount of your taxable income.

The standard deduction amount varies depending on your income, age, and your filing status. The amount is also adjusted annually for inflation. For 2021 the standard deductions amounts are $12,550 for married couples filing separately. $18,800 for heads of households. $25,100 for married couples filing jointly.

Certain taxpayers cannot use the standard deduction:

        •  A married individual filing separately whose spouse itemizes deductions.
        • An individual who files a tax return for a period of less than 12 months because of a change in his or her annual accounting period.
        • An individual who was a nonresident alien or a dual-status alien during the year.

Itemized deductions include amounts you paid for state and local income or sales taxes, real estate taxes, personal property taxes, mortgage interest. You may also include gifts to charity and part of the amount you paid for medical and dental expenses.

Often taxpayers would usually benefit most by itemizing if itemized deductions exceed the standard deduction amounts above:

          •  Made large contributions to qualified charities
          • Paid substantial interest or taxes on your personal home
          • Had large “other” tax deductions
          • Had large uninsured medical or dental expenses

The higher standard deduction under Tax Reform means fewer taxpayers are itemizing their deductions. However, taxpayers may have an opportunity to itemize this year by keeping these tips in mind:

Deducting state and local income, sales and property taxes. The deduction that taxpayers can claim for state and local income, sales and property taxes is limited. This deduction is limited to a combined, total deduction of $10,000. It is $5,000 if married filing separately. Any state and local taxes paid above this amount can’t be deducted.

Refinancing a home. The deduction for mortgage interest is also limited. It’s limited to interest paid on a loan secured by the taxpayer’s main home or second home. For homeowners who choose to refinance, they must use the loan to buy, build, or substantially improve their main home or second home, and the mortgage interest they may deduct is subject to the limits described in the next bullet under “buying a home.”

Buying a home. People who buy a new home this year can only deduct mortgage interest they pay on a total of $750,000 in qualifying debt for a first and second home ($375,000 if married filing separately). For existing mortgages, if the loan originated on or before December 15, 2017, taxpayers continue to deduct interest on a total of $1 million in qualifying debt secured by first and second homes.

Donating items and deducting money. Many taxpayers often find unused items in good condition they can donate to a qualified charity. These donations may qualify for a tax deduction. Taxpayers must have proof of all cash and non-cash donations.

Deducting mileage for charity. Driving a personal vehicle while donating services on a trip sponsored by a qualified charity could qualify for a tax break. Itemizers can deduct 14 cents per mile for charitable mileage driven in 2022.

If you have any questions related to itemized deductions or tax planning in general, please call our office.

Leave a Reply

Your email address will not be published. Required fields are marked *