At what point do I start itemizing on my tax return?

Question

My husband and I have always just taken the standard deductions on our tax return. I'm wondering if it would be worth it to start itemizing. We have a house, so we could deduct our mortgage interest right? Only our interest only comes out to about $6500 for the year. We don't have any medical bills because he's in the Army so we're completely covered by Tricare. I'm going to school full time (junior in college) and getting my GI Bill but not working. I do have daycare expenses related to going to school full time. We also donate to chariies. At what point does it pay to start itemizing? BTW we always get all our taxes back plus some since we get the Earned Income Credit.

Answer 1

Standard deduction for 2007 for married filing jointly (which I'm assuming you will take) is $10,700. If your itemized deductions exceed that amount, then you would be better off to itemize. Itemized Deductions are as follows:

There are a number of allowable deductions:

Medical expenses, to the extent that the expenses exceed 7.5% of the taxpayer's AGI. (e.g., a taxpayer with an AGI of $20,000 and medical expenses of $5,000 would be eligible to deduct $3500 of their medical expenses ( 20,000 X .075 = 1500; 5000 - 1500 = 3500 ).) The 7.5% floor means that most taxpayers are unable to take advantage of the medical expense deduction. Allowable medical expenses include:
Payments to doctors, dentists, surgeons, chiropractors, psychologists, counselors, physical therapists, osteopaths, podiatrists, home health care nurses
Premiums for medical insurance (but not if paid by another, or with pre-tax money)
Premiums for qualifying long-term-care insurance, depending on the taxpayer's age
Payments for prescription drugs and insulin
Payments for devices needed to treat or compensate for a medical condition (crutches, wheelchairs, prescription eyeglasses, hearing aids)
Mileage for travel to and from doctors and medical treatment
Necessary travel expenses
Non-deductible medical expenses include:
Over-the-counter medications
Health club memberships (to improve general health & fitness)
Cosmetic surgery (except to restore normal appearance after an injury or to treat a genetic deformity)
State and local taxes paid, including:
Income taxes (or, alternatively, state and local general sales taxes[1])
Property taxes (assessed by reference to the value of the property)
but not including:
Use taxes
Excise taxes
Fines or penalties
Mortgage interest expense on debt incurred in connection with up to two homes, subject to limits (up to $1,000,000 in purchase debt, or $100,000 in home equity loans)
also, points paid to discount the interest rate on up to two homes; points paid upon acquisition are immediately deductible, but points paid on a refinance must be amortized (deducted in equal parts over the lifetime of the loan)
Investment interest, up to the amount of income reported from investments (the balance is deferred until more investment income is declared)
Charitable contributions to allowable recipients; this deduction is limited to either 30% or 50% of AGI, depending on the characterization of the recipient. Donations can be made as money, or in the form of goods. The value of donated services cannot be deducted as a contribution. Reasonable expenses necessary to provide donated services can, however, be deducted (such as mileage, special uniforms, or meals). Non-cash donations valued at more than $500 require special substantiation on a separate form. Non-cash donations are deductible at the lesser of the donor's cost or the current fair market value. Eligible recipients for charitable contributions include:
Churches, synagogues, mosques, other houses of worship
Federal, state, or local government entities
Fraternal or veterans' organizations
Non-eligible recipients include:
Individuals
Political campaigns or political action committees (PACs)
Casualty and theft losses, to the extent that they exceed 10% of the taxpayer's AGI (in aggregate), and $100 (per event)
Miscellaneous expenses related to the production of income or the calculation of taxes, to the extent that they exceed 2% of the taxpayer's AGI, including:
Job-related clothing or equipment, such as steel-toed boots, hardhats, uniforms (if they are not suited for social wear: suits and tuxedoes are not deductible, even if the taxpayer does not like to wear them, but nurses' and police uniforms are), tools and equipment required for work
Unreimbursed work-related expenses, such as travel or education (so long as the education does not qualify the taxpayer for a new line of work; law school, for example, is not deductible.)
Fees paid to tax preparers, or to purchase books or software used to determine and calculate taxes owed
Gambling losses, but only to the extent of gambling income (For example, a person who wins $1,000 in various gambling activities during the tax year and loses $800 in other gambling activities can deduct the $800 in losses, resulting in net gambling income of $200. By contrast, a person who wins $3,000 in various gambling activities during the year and loses $3,500 in other gambling activities in that year can deduct only $3,000 of the losses against the $3,000 in income, resulting in a break-even gambling activity for tax purposes for that year -- with no deduction for the remaining $500 excess loss.)

Answer 2

You would itemize if your deductions total more than the standard deduction - on a joint return for 2007, that's $10,700. You mention $6500 in mortgage interest, and charitable donations. In addition to those, you can take real estate taxes and any state and local taxes that you pay. You are probably pretty close. Look at schedule A and its instructions (download at irs.gov) to see what you might have that's deductible, and keep track of those items for the year.

Itemizing can only take your taxes to zero, not below. So if your tax liability is already zero, then itemizing won't save you anything. But if you get everything back plus some only because of the EIC, then it might save you a little.

Answer 3

I'm unclear in your question(s). Perhaps you can edit and explain further. Do you mean real estate taxes that you pay to your town/city ? I've never heard of them being paid monthly, they are usually paid quarterly, but if you have a mortgage and the bank is paying the taxes then you have an escrow account whereby a portion of your monthly payment is withheld to pay the taxes at the end of the quarter. Why are you expecting a supplemental tax bill ? Was the house reappraised or did you do some remodelling that is causing the town/city to bill you at a rate higher than what was calculated at the time of closing ? I also don't understand what you mean by "when it comes to tax season should you anticipate additional taxes as homeowners?" Income tax has nothing to do with home ownership. Both federal and state (and city when appropriate) is based on income less deductions. Period. You can (as someone else mentioned) claim mortgage interest you paid and real estate taxes paid (by your or by the bank who holds your mortgage on your behalf). If you moved for work, there are special circumstances where some of those costs could be written off, but it's too complex to try to answer here. Best to find a good tax accountant.

Answer 4

When the total of your itemized deductions is more than the standard deduction.

In addition to those that you mentioned, itemized deductions also include real estate taxes on the house and your choice of either sales tax or state income tax (both not both, so take whichever is more).

Answer 5

Based upon what you said you aren't going to itemize more than likely but it might be close. Honestly for $30 you can buy the basic version of TurboTax and it will walk you through this whole process and determine which is best for you. It isn't at all hard to use, you don't have to be a CPA - which I am but the software acts as an interviewer and you just answer the questions and when finish it is done and will do audit checks and print your return or file it electronically for you.

Answer 6

Itemize at the point your itemized costs will exceed your standard deduction. Sounds like you are close enough to keep track and see if itemizing will be greater or not. Note you should be taking advantage of the education credits if you are not already.