Many Americans dread the annual ritual of gathering documents and trudging down to the local tax preparation center.
But in reality, many of those people suffer needlessly through that exercise — and the related expense of having someone else sift through your shoebox of receipts.
That's because all U.S. taxpayers are granted a substantial "standard deduction" each tax year. This sum is the amount that Uncle Sam is willing to knock off your tax bill, no questions asked.
And unless all those receipts add up to a tax break that tops this guaranteed standard deduction, you're just wasting your time.
"Approximately two thirds of all tax returns use the standard deduction," said Monica Rebella, a certified public accountant based in California.
And while some of those folks may have simply lost the proper documentation, the bottom line is that many never had significant enough expenses worth bothering with complex, itemized tax returns.
What is your standard deduction?
Deciding on whether it's worth digging through all your old documents and itemizing your return starts with figuring out what your standard deduction is.
For tax year 2014, standard deduction amounts are $6,200 for single filers or those married but filing separately, $9,100 for those defined as "head of household," and $12,400 for married taxpayers filing jointly.
Rebella notes those are not universal — for instance, those older than 65 or those who are legally blind can get an extra amount — but apply to the majority of taxpayers.
If you can't document qualified expenses over your guaranteed deduction for 2014, then it's best to simply fill out the one-page Form 1040 and write your standard deduction amount on Line 40.
If you're paying a few hundred bucks each April for a tax prep firm to needlessly go through receipts and ultimately simply file this single-page return with a standard deduction, you may want to consider doing it yourself this year to save yourself the hassle and expense.
When does itemizing make sense?
Of course, in some cases it is quite easy to qualify for a deduction that is significantly higher than your standard deduction.
Rebella says that if you're a homeowner, the simplest way to see if itemizing makes sense is "to look at form 1098 for mortgage interest." This is one of the most common expenses claimed on itemized returns, and can frequently surpass your standard deduction all by itself.
For instance, a home buyer who took out a $200,000 loan last year could easily have paid over $8,000 in mortgage interest at current rates — which can be written off your taxes. And if this buyer is single, itemizing that mortgage interest alone qualifies her for a bigger tax break that the aforementioned $6,200 standard deduction.
In Publication 501, the IRS itself recommends looking into an itemized return in the following cases:
• You do not qualify for the full standard deduction for specific reasons, such as you are married and filing separately, and your spouse itemizes his return.
• You had incurred large out-of-pocket medical expenses
• You paid significant mortgage interest or property taxes
• You had significant business expenses for which you weren't reimbursed
• You suffered theft or property damage of significant value
• You made significant contributions to charity
Remember you can claim expenses in more than one area to achieve a higher deduction. For instance, if you only have $4,000 in mortgage interest but donated $4,000 to charity then the expenses add up to more than your standard deduction and would justify an itemized return.
And what if you take the standard deduction in past years, only to learn you could have qualified for a bigger tax break if you itemized?
Thankfully, the IRS allows for amended returns to be filed with updated tax breaks. Presuming you have all the proper documentation and that the deductions qualify, you can file a form 1040X and get all the tax breaks that you are due.
When you should ask for help
Of course, it's easy to decide to itemize if you have a ton of mortgage interest or massive hospital bills. But what if you have more modest expenses, or if you're in a unique situation with special tax rules?
In these situations, the best solution may be to go to a professional who can guide you.
The tax code is very complex and requires a trained eye to unlock the best deductions, said Beth Powell, a CPA and tax manager at accounting and professional services firm CBIZ.
This is particularly true for taxpayers, where "not every dollar you spent can be subtracted from your income due to income thresholds," she said. Additionally, "some of the allowable itemized deductions have limitations" based on your specific situation.
A good accountant can not only navigate the complicated specifics of your return in these cases, but perhaps unlock big deductions you may have overlooked.
And if you don't have the money for a high-priced CPA? Thankfully, there a number of free options out there.
The IRS offers programs that include Volunteer Income Tax Assistance and Tax Counseling for the Elderly. These services are provided at no cost for seniors, the disabled or taxpayers who make less than $53,000 a year.
For more information on tax preparation help through VITA or CTE, call 800-906-9887.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor's Guide to Finding Great Stocks.
