Tax Tip #5: The Power (and Benefit) of Itemizing

by David Bakke

taxes2I’ll never forget it.  It was the first year of filing my taxes after I bought my first home, and I had no idea what to do.  I knew that whipping through a 1040EZ would just not get it anymore.  I had heard of all the new tax considerations that came along with owning a home, and I wanted to take full advantage of them.

I considered taking my taxes to an accountant, but I had done that before and really got burned.  I was charged way too much money for the amount of work done.  I had an idea I could do them on my own, but was just a little leery about the whole process.  Finally, I threw caution to the wind, bought some tax software and dove in.

It wasn’t too far into the process where  I first encountered that dreaded word “itemize“.  It used to strike fear into my heart!  I had visions of piles of paperwork and receipts, scouring through them for days to make sure I got everything right.  The process of filing my taxes, which used take me all of about 30 minutes, I was now convinced would be more in terms of weeks and not minutes.

Regardless, I decided to do it.  I answered all of the questions in the “itemization” section of the interview on my tax software.  Shockingly, this was done in just about an hour.  I knew I would have to go back for a few things because I didn’t have ALL of the information that I needed, but I had most, and the process was not very painful at all.

My point is this.  If you are intimidated by doing your own taxes, get over it.  It’s not that hard (this has been covered in other posts).  If you are not itemizing, you should seriously look into it.  There is possibly a great deal that you might be leaving on the table by not itemizing.

I can’t remember what the standard deduction was the first year I itemized but I think it was around $12,000.  After completing the process, my total dollar amount for “deductions” was close to $17,000.  This means that I paid taxes on $5,000 less that I would have if I hadn’t itemized.  I am guessing I was in about the 28% tax bracket at the time, so I guess I saved myself about $1400 that year.

This past year, it wasn’t such a huge savings, but it was still well worth it.

I will tell you this, though.  In order to effectively itemize, you do have to have a certain degree of organization.  You need to know what you paid in certain categories, and the best way to do this is to keep track of it throughout the year.

Before you start moaning and groaning, please believe me when I tell you that this process is not that hard.  What you’ll need is nothing more than a small file folder and you need to do a little thinking on a monthly basis.  I will get more into this in a post a I have planned for later on this week, but basically I keep track of my out-of-pocket medical expenses, any money that I spend related to my job that is not reimbursed, anything and everything that I donate throughout the year, and besides a few other minor things that’s about it.

In short, consider itemizing.  In most cases, you’ll be glad you did.

As always, your comments and feedback are greatly appreciated below.

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