If you’re thinking about itemizing your deductions rather than taking the standard deduction to get a bigger tax break, tracking your allowable expenses throughout the year can give you an idea of where you stand. Generally, if you have a home mortgage, you will often find you have enough expenses to making itemizing worthwhile, especially if you can take other deductions as well. Itemizing your deductions can lower how much money you owe in taxes, but you need to prove any deductions you claim.
Keep careful records of any allowable expenses you can claim when itemizing deductions. These may include medical bills, mortgage interest, charitable donations, taxes and more. You must have supporting documentation, such as paid receipts, for any expenses you itemize on Schedule A.
Pull out last year’s Form 1098 -- Mortgage Interest Statement -- to see how much mortgage interest you paid. Although the amount of mortgage interest you pay on your home loan is less each year, what you paid in the previous year will give you a reasonable estimate of how much you can claim this year. You will receive your new Form 1098 in the mail in December or January. If you refinanced your mortgage in the meantime, you may be able to take a larger mortgage interest deduction.
Check your property tax bills for the amount of real estate taxes you’ve paid or will pay before the end of the tax year. You can't deduct any late penalty fees you may owe. If you pay your property taxes through an escrow account, you should receive a tax summary from your mortgage lender at the end of the year. In the meantime, ask your lender how much of your mortgage payment is deposited in an escrow account for taxes each month.
Take a look at your Form W-2 from the previous year. This will show the state and local income taxes that you paid on your wages. If you are earning a similar income again this year, you can expect to pay about the same amount of taxes unless there was an increase in the tax rates. You may also be paying more if your taxable income increased since last year. If you’re self-employed, add up the estimated tax payments you make to your state and local governments.
Collect together your receipts or cancelled checks for any charitable contributions you make. You can also estimate your charitable contributions deduction if you know that you will be contributing to the same charities and nonprofits again this year.
Add up the premiums you pay for individual health insurance if your employer doesn’t insure you under a group coverage plan. Keep all the bills and receipts you have for any medical and dental services or prescription drugs for which you pay the costs out of pocket. In 2011, taxpayers who itemized deductions could deduct the amount of unreimbursed medical expenses that exceeded 7.5 percent of their adjusted gross income.
Examine a copy of last year’s Schedule A for other miscellaneous expenses you might be able to include when itemizing your deductions. Miscellaneous expenses that qualify as itemized deductions include unreimbursed employee business expenses, tax preparation fees and certain other expenses. The amount of the expenses you deduct must exceed 2 percent of your adjusted gross income.
Total all the allowable expenses to get your final estimate. This is an estimate of the amount you would enter on the "itemized deductions or standard deduction" line on Form 1040 if you were actually filing your income tax return. Always check your math even when you are estimating.
Items you will need
- Schedule A
- Previous year's Form 1098
- Previous year's W-2 forms
- Last year's property tax bill
- Medical bills
- When comparing the standard deduction to your itemized deductions, choose the deduction that will give you the best tax advantage. As a rule, if the amount of your itemized deductions is more than the standard deduction for your filing status, you can benefit by itemizing your deductions.
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