If you don’t itemize your taxes, you may be overpaying the government, according to Bankrate.com.
The General Accounting Office has found that filers of 1998 returns who used the standard deduction instead of itemizing paid the Internal Revenue Service almost $1 billion more than they should have.
Should you itemize? It depends on your expenses for the year. In order to qualify for itemization, your expenses in certain categories must be more than a certain percentage of your income. Specifically, certain miscellaneous itemized deductions must exceed 2% of your adjusted gross income before you qualify. Here’s a description of itemization from the IRS:
Whether to itemize deductions on your tax return depends on how much you spent on certain expenses last year. Money paid for medical care, mortgage interest, taxes, charitable contributions, casualty losses, and miscellaneous deductions can reduce your taxes. If the total amount spent on those categories is more than the standard deduction, you can usually benefit by itemizing.
On the other hand, some people are required to itemize, even if the standard deduction would be more favorable. The following defines people who must itemize (from Quicken’s itemization information):
* Married filing separate and your spouse itemizes.
* U.S. citizen who can exclude income from U.S. possessions.
* Nonresident or dual-status alien.
* You file a short-period return because of a change in your accounting period.
Some expenses, such as state and local income taxes, interest expenses (on a mortgage, for example), and charitable contributions are always deductible and do not need to reach the 2% floor.
Since I use software — TurboTaxOnline and the free-to-print TaxAct — to calculate my taxes, I’m always sure to attempt to itemize. Not once has itemization worked out in my favor, so I have been taking the standard deduction. For many people, mortgage interest payments are what often push people above the 2% threshold.
When has itemization worked for you and when has it not?