To determine whether itemized or standard tax benefits are better for taxpayers, here is an example to use.
Peggy, who is a single taxpayer, usually takes the standard deduction every year. However, in January 2023, Peggy bought a house and now has mortgage interest and property tax expenses to consider.
Peggy's AGI is 7% higher than her medical expenses each year. Note: The medical expense deduction requires Peggy's medical expenses to exceed 7.5% of her adjusted gross income (AGI). Peggy's AGI is 7% greater than her medical expenses, resulting in her medical expenses not exceeding 7.5% of her AGI. Therefore, she would not be able to take advantage of the medical expense deduction).
Every year, Peggy gives away 3% of her adjusted gross income (AGI) to charitable organizations.
Peggy will be paid $50,000 in 2023 and expected to receive $55,000 in 2024.
The mortgage interest deduction for Peggy is $6,500 for 2023 and $6,500 for 2024.
In November of each year, property taxes of $4,000 are assessed and must be paid by January 10 of the following year.
In 2023, the standard deduction is $13,850 and in 2024, it is $14,600.
Peggy needs to evaluate standard deductions and itemized deductions in each of the following examples to reduce the taxable income.
Example One: Peggy paid her medical expenses and mortgage interest for 2023 during the meeting with the CPA. In December 2023, Peggy paid her property taxes and contributed to the community.
- Peggy's standard deduction for 2023 is $13,850.
- The year 2023 has the following itemized deductions:
- Property taxes will be $4,000 for the year 2023.
- The charitable contributions for the year 2023 will be $1,500 because $50,000 * 3% = $1,500.
- The mortgage has an interest rate of $6,500.
- Medical expenses are not charged as long as they do not exceed 7.5% of the AGI.
Total itemized deductions are : $12,000 ($4,000 + $1,500 + $6,500).
Therefore, Peggy will apply a standard deduction of $13,850 for the year 2023 rather than the itemized which are $12,000.
Example: Property taxes are supposed to be paid in the year they are assessed in 2024, but Peggy's 2023 charitable contribution was not made until January 2024.
Explanation:
The standard deductions for 2024 are $14,600 in this instance.
As such, the itemized deductions are as follows:
- The interest for a mortgage of $6,000.
- The cost of property taxes is $4000.
- The charitable deduction for 2023 is equal to $1,500 when the amount is $50,000 * 3%.
- In 2024, the charitable deduction will be $1,650 because $55,000 * 3% = $1,650.
- Medical expenses that are below 7.5% of the AGI are deemed 'o'.
- The total deduction for items is $13,150.
Thus, Peggy will use the standard deduction of $14,600.
Peggy made a 2023 charitable contribution in January 2024 and also paid her assessed property taxes in 2024. Peggy received payment for her 2024 expenses in 2024.
Peggy's standard deductions cost $14,600.
The following is a description of Peggy's itemized deductions:
- In 2024, the mortgage interest rate will be $6,000
- In 2023, property taxes will be $4,000
- In 2024, property taxes will be $4,000
- When the donation amount is $50,000 * 3%, the charitable deduction for 2023 is $1,500.
- The charitable deduction will be $1,650 in 2024 since $55,000 * 3% = $1,650.
The standard deduction of $14,600, instead of $17,150, is what Peggy will apply.
Example: Peggy fulfilled her obligations by paying her medical expenses for 2023, assessing her property taxes for 2023, and making her annual charitable contribution for 2023 in 2024 along with other 2024 itemized expenses.
Explanation: Peggy has the option to use either the standard deduction for 2024, which is $14,600, or the itemized deduction, which is outlined below, in order to lower taxes.
- Medical deduction 7% of $50,000 for the year 2023 = $3,500
- Medical deduction 7% of $55,000 for the year 2024 = $3,850
- Allowed medical expense 7.5% of $55,000 = $4,125
- Thus, deductible medical expense as itemized deuctions are $3,225 ($3,500 + $3,850 - $4,125 )
- Charitable deduction $50,000 x 3% for the year 2023 = $1,500.
- Property taxes for the year 2023 = $4,000
- Property taxes for the year 2024 =$4,000
- Mortgage interest for the year 2024 = $6,000
- Charitable deduction $55,000 x 3% for the year 2024 = $1,650
Itemized deduction for the year 2024 are $20,375 ($3,225 + $1,500 + $4,000 + $4,000 + $6,000 + $1,650).
Due to the fact that itemized deductions are higher than standard deductions. Peggy will be filing for itemized deductions of $20,375, instead of the standard deductions of $14,600.
