The IRS statistics show that most taxpayers use the standard deduction. However, you may be able to reduce your tax bill if you itemize on Schedule A.
What expenses are deductible on Schedule A?
I think most people are familiar with the typical itemized deductions, which requires a Schedule A to be filed. Home mortgage interest, real estate and personal property taxes, and state and local income taxes or sales taxes and charitable donations are among the largest deductions. Other itemized deductions, such as medical expenses and unreimbursed employee business expenses are not allowed in full. Medical expenses must exceed 10% of adjusted gross income and unreimbursed employee business expenses must exceed 2% of adjusted gross income in order to be deductible on Schedule A. There are other deductions, such as casualty and theft losses, gambling losses, and hobby expenses, which qualify as itemized deductions, but are not frequently encountered.
The standard deduction for 2015 for each filing status is as follows:
Married Filing Jointly $12,600
Head of Household $9,250
Married Filing Separately $6,300
To the extent the total of your itemized deductions does not exceed the standard deduction for your filing status, you will not benefit from itemizing your deductions. The standard deductions are fairly high, and, as a result, fewer people are able to benefit from itemizing their deductions.
What if I bought a house in 2015?
I have to admit, this is the reason I’m writing this post. I have had several new tax clients this year who were first time homebuyers in 2015. They have all come to me excited, anxious to see what their refund will be since they are certain homeownership will reduce their tax burden. All of these clients have been disappointed. Why? Because they bought their homes late in 2015 and did not pay an entire year’s worth of mortgage interest and property taxes, they are not able to itemize their deductions. Additionally, mortgage rates have decreased significantly over the past few years, so the amount of interest paid to purchase a home has decreased. I would prefer to pay less in interest than reap a tax benefit. The taxpayers who purchased homes in 2015 will most likely be able to itemize their deductions on their 2016 tax return because in 2016, they will pay a full year’s worth of interest and taxes.