Week of January 30, 2017: Reduce overall tax liability by forcing the itemized deduction (Georgia specific)
Most people are familiar with the concept of itemizing deductions. The scope of this tip will not be how to calculate your deduction but will show you how to potentially lower your overall tax liability. You would typically claim the itemized deduction if your eligible amount was more than the standard deduction.
Federal Standard deductions for the 2016 tax year (excluding additional amounts for blindness and age):
Married Filing Joint = $12,600
Head of Household = $9,300
Single & Married Filing Separate = $6,300
However, I recommend looking at claiming the itemized deduction even if you do not cross over the above thresholds and you live in Georgia. This is due to the fact you can only claim an itemized deduction in Georgia if you itemize at the Federal level.
For 2016, Georgia Standard deductions are:
Married Filing Joint = $3,000
Head of Household = $2,300
Single = $2,300
Married Filing Separate = $1,500
Let’s look at a basic example of a married filing joint couple:
Effective Federal Tax Rate = 10%
Georgia Effective Tax Rate = 5%
Eligible Itemized deductions = $10,000
It appears the federal standard deduction would best since this couple could deduct $12,600 with the standard deduction and only $10,000 if they itemized. However, they would also be limited to only a $3,000 standard deduction in Georgia.
Therefore, if this couple forces the itemized deduction it would cost them $260 ($2,600 difference b/t standard & itemized x tax rate) at the Federal level but would save them $350 ($7,000 difference b/t standard and itemized x tax rate) at the State level; for a net tax liability reduction of $90.
Please keep this tip in mind as you are filing your taxes this year, as each person’s circumstance will determine at what level it makes sense to force the itemized deduction.
Please email accountingtips@integrated-accounting.com if you would like additional information or have any questions.
