What are Itemized Deductions?
These deductions are eligible expenses that taxpayers can claim on federal income tax forms to reduce their tax liability. They are usually limited to a percentage of adjusted gross income (AGI). Individuals may take either standard deductions according to their filing status or itemize deductions. They may not do both.
Some itemized deductions reduce tax liability regardless of their category. Others, like investment fees, can only offset profits earned in that category.
Types of Itemized Deductions
Deductions fall into several categories, each of which may have its own claim limitations.
You may deduct medical expenses that exceed 10 percent of your AGI for the year. Senior citizens over age 65 may deduct medical expenses that are more than 7.5 percent of their income. These costs include, but are not limited to:
- Medical and dental care
- Hospital or ambulance fees
- Insurance premiums and prescription costs
- Psychiatric care or addiction treatment
- Smoking or weight loss program costs
- Assistive devices like wheelchairs, glasses, or hearing aids
- Service animals
- Medical equipment
Property taxes are deductible, but only for the year in which they are paid. Individuals also have the option of claiming either state income tax or state and local sales tax as a deductible expense. Since some states don’t have an income tax, residents can save more by claiming a sales tax deduction.
Homeowners may deduct interest on a first or second mortgage. The deduction may be calculated as a percentage or on points paid during the year.
Cash, asset, and goods donations are deductible when made to an eligible organization. Most religious organizations and community agencies like the Red Cross, Boy or Girl Scouts, or the Salvation Army are authorized charitable organizations. Get a receipt for all donations. Cash contributions are deductible dollar-for-dollar, while gently used clothing and other goods are assessed a fair market value.
Casualty and Theft Losses
If a fire, theft, vandalism or natural disaster result in a loss, the value of the property may be deductible. However, each event must exceed $500, and is only deductible for amounts more than 10 percent of your AGI. Expenses covered by insurance are ineligible for deduction.
Deductions in this category won’t make or break you, but they can provide added tax relief when you are already itemizing. Some of the deductible expenses are:
- Gambling losses or hobby expenses that offset gains
- Work-related expenses, including uniforms, job-hunting costs, and half of business-related meals or entertainment
- Tax preparation fees
- Retirement account or trust administration fees
- Classroom materials for teachers
- Home office expenses
- Medical exams or educational expenses required by an employer
Most of these expenses must be over two percent of your AGI before they can be deducted from your taxes.
How to Itemize IRS Deductions
Taxpayers who itemize must use form 1040; itemized deductions are listed on Schedule A and attached to the long form. Whether you prepare your own taxes or consult a professional, good records are vital. Organize receipts by deduction type and year. It is wise to keep them for several years after filing in case you are audited.
Should You Use Itemized Tax Deductions?
Itemized deductions don’t work for everyone. Some taxpayers may benefit more from using the standard deduction. Compare your tax liability with each type of deduction to determine which is best for your situation.
Some people have to itemize. If a married couple files separate returns and one spouse itemized deductions, the other spouse must do the same. Nonresident or dual-status aliens must also itemize deductions since some of their income may originate in another country.