5 Mistakes to Avoid with Itemized Deductions

Itemized deductions can significantly reduce the sum you owe to the IRS and your state treasury each year. Itemizing deductions is an option best left to individuals who have deductions greater than the standard deduction each year. The standard deduction depends on your tax bracket. If your itemized deductions exceed this amount, be sure to itemize effectively, and avoid these common mistakes.

#1 Deducting too Much for your Income

Deductions should be relatively proportionate to your income. If you deduct over 30 percent of your income, you may be setting yourself up for an audit. However, some years, you may have very high deductions. If you sold your home and cleaned out all of your belongings, donating large items to charity, it is possible you will have a high charitable deduction this year, for example. Whenever you have very high deductions, consider spreading them out over multiple years to avoid deducting too much for your income level and triggering an audit.

#2 Failing to Document Deductions

If you do not document your deductions, you cannot legally take them. Receipts are the best way to document any deduction. You may also consider keeping files with photos where possible. For example, if you are deducting interest on a loan taken to pay medical expenses, keep files from your doctor including all the bills you received and paid with the loan. If you are donating a car to charity, take a photo of the car and keep this along with this estimated valuation in order to protect yourself in an audit.

#3 Failing to Bunch Deductions

You can only deduct certain expenses if they exceed a certain portion of your income. For example, medical expenses can only be deducted in 2011 if they exceed 7.5 percent of your income. You can use this knowledge to make decisions about your care. If you need two surgeries, each 6 months apart, try to have them in the same fiscal year. This can allow you to deduct the sum whereas you would not be able to if they fell in separate years and therefore did not make up a great enough portion of your annual income.

#4 Failing to Make Deductions in Time

You must make all your deductions prior to December 30 of the year you are filing for. So, if you plan on donating a large portion of goods or cash to a charity, do it before the end of the year. Deposit all funds into your retirement account by the end of the year. This will help you plan each year and know what your deductions will be.

#5 Failing to Explain Deductions

If you have very high deductions in any year, you may trigger an IRS audit. To avoid this, consider attaching an explanation of each deduction. For example, enclose the file and photos on the car you donated. Enclose information on your medical expenses verifying the reported bills are correct. Taking this simple step can save you the hassle of an audit in the future.