When it comes to saving money on income tax, there is one form that every taxpayer should at least take a shot at: Schedule A—Itemized Deductions.
I've found that when it comes to "itemizing," many people simply throw up their hands and say to hell with it. After all, complexity helps the tax collectors, and they're not really all that interested in simplifying things for us. But this needn't be the case, if you'll just sit down with a good tax book and carefully go through the different deduction possibilities.
The people responsible for the tax laws decided from the very beginning of the income tax that everyone should get certain deductions: you can either go the "general" route and take the "standard deduction" which is now taken into consideration in the tax tables, or you can "itemize" your deductions if you have more than would be given to you with the standard.
Itemized deductions are reported on Schedule A where the different areas of deductions are laid out. If you count up more itemized deductions on Schedule A than you'd get using the standard deduction, then you'll use Schedule A.
Of course, there's no way to tell if you can "beat the standard deduction" until you actually go through Schedule A, so everyone should at least try it each year at income tax time. This is a problem faced by tax consultants as well, although they can generally nail down the answer with about a dozen well-placed questions. The trick is knowing what the personal deductions are and how much you must find to make itemizing worthwhile for your filing status.
Although the numbers change almost yearly because of congressional tinkering, these are the amounts you needed to exceed in 1977 to make itemizing worthwhile:
• "Single" or "unmarried head of household": $2,200
• "Jointly" (married) or "qualifying widow(er) with dependent child": $3,200
•"Married, filing separately": $1,600
If you can't find enough itemized deductions to exceed the amount for your filing status, you'll do better by simply taking the standard deduction.
What are the areas you can make money on by itemizing? There are six general sections on Schedule A. Within each section there are many, often scores, of possibilities. Let's go through each.
First, you start up in the upper-left corner of the Schedule A on the "Medical and Dental Expenses" portion. This is the most complicated part of the Schedule A, which is why it is placed at the beginning of the form: its complexity tends to discourage people from itemizing. The IRS likes that.
Within this area you may take deductions for any and every expense having to do with medical concerns. What kinds of things? Take a look in your medicine cabinet: cold medicines, cough syrup, Q-tips, salves, iodine, adhesive tape, bandages, Band-aids, thermometers…the list goes on.
And then there are those visits to the doctor and dentist, deductible across the board. Hospitalization. Psychological counseling. Dental expenses. Optometrists. Glasses. Nursing care. Lab fees. Birth control pills. X-rays. And much more, limited only by your personal circumstances.
The second area of the Schedule A concerns "taxes." That is, state and local taxes (only) are deductible. This includes state income taxes, property taxes, state gasoline taxes, sales taxes, personal property taxes and others. Most of the specific taxes each have a line, so you can list each one out as you hit it.
At the bottom left side of the Schedule A, you'll next find the "interest expense" section. All the interest you pay out during the year is deductible. People tend not to understand the implications of this: you probably pay interest in half a dozen places that you wouldn't even think of unless a tax man ferreted out the information during an interview.
Consider these common interest expenses: house payments, installment sales, credit sales of all types, credit card payments, personal loans, credit union loans, property payments other than on your home, car payments. There are lots of others; the problem is you have to think of them all. To figure the amount of interest you paid someone over the year, simply call the organization and ask them; usually that won't be necessary however, since most businesses send a statement in January saying "keep this for income tax purposes." On that statement they tell you how much interest (or "finance charges," or "money use payments" or whatever) you paid during the preceding year.
Now you can jump to the upper right side of Schedule A to deal with the "contributions" area. Contributions include anything you've given of value (except your time, which you cannot deduct for) to any non-profit type organization. The head of the IRS has a list of "officially approved" charitable organizations, but in practice you can figure just about every charitable organization you know of is legitimate for this purpose.
Such organizations include your church, Goodwill, Salvation Army, Boy and Girl Scouts, March of Dimes, etc. There are hundreds and hundreds. If you gave property donations—such as clothes, shoes, old furniture, etc.—don't let that scare you. Just jot down the articles you gave (generally), tell who you gave them to, when you gave them, and estimate their worth. That's a deduction. You can also deduct the cost of running your car for charitable purpose at the rate of 7 cents a mile—that means if you drive a thousand miles over the year for a charity, you'll get a $70 deduction, which will at least pay for gas.
You next move down to the "Casualty or Theft Loss(es)" area. The IRS has worked up a set of computations used here so as to absolutely minimize any deduction. Nevertheless, if you had a loss from any "sudden and unexpected" occurrence—and it wasn't reimbursed by insurance—you'll get a deduction. Such losses include fire, theft, auto wrecks, storm damage, fire damage, earthquakes, hurricanes, etc. Think about it: if you had anything happen that cost you money or decreased the value of any of your property, you may have a casualty or theft loss.
Finally there is a "Miscellaneous Deductions" area which is the catch-all for the Schedule A. Here you'll want to put deductions such as union dues, business expenses (if you're an employee rather than self-employed), tax records expenses, tax preparations expenses, depreciation on any tools or equipment you use as an employee, etc. If you're creative here, you can often pick up several very good deductions.
Then at the bottom right of the Schedule A you'll tally up all the deductions from the entire form. If you haven't been able to exceed the standard deduction amounts we talked about above, you'll discard the Schedule A—it will pay you better to simply use the standard deduction. On the other hand, if you find you have exceeded the amount for your filing status, then you'll continue with the instructions at the bottom.
This year the IRS is calling the result of a good Schedule A "excess itemized deductions." All that means is they're trying to make you feel guilty for beating the standard deduction…and saving more taxes. Don't worry about it. After all, like the old capitalist that said he'd never really seen an "excess profit," I've never seen an "excess deduction."
© Copyright 1978 by Tim Condon
This article originally appeared in print under the headline "Taxes: Maximizing Your Deductions".