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Every taxpayer who files a Form 1040 tax return is automatically entitled to a Standard Deduction. This is a predetermined amount that the IRS allows taxpayers to deduct from their incomes. The amount varies between taxpayers, and is determined primarily by the taxpayer’s filing status.
The government also allows taxpayers to deduct certain specific expenses if they exceed the amount of their Standard Deduction. These deductions are called Itemized Deductions.
You can deduct either your Standard Deduction OR your Itemized Deductions, but not both. So, before you file your taxes, it would be a good idea to figure your deductions using both methods, and then choose the one that gives you the higher deduction.
Some taxpayers don’t qualify for the Standard Deduction and therefore will have to itemize. This includes married couples who file separate returns; if one spouse itemizes, the other will have to do likewise. Also, non-residents are not eligible for the Standard Deduction, so they will have no other option but to itemize.
Itemized Deductions are comprised of certain eligible expenses that individual taxpayers in the United States can report on their federal income tax returns in order to decrease their taxable income. In order to claim your itemized deductions, you must complete what is called a Schedule A, on which you report all your eligible expenses in the appropriate sections. These eligible expenses fall into a number of categories, and we shall proceed to look briefly at each category below.
Medical and Dental Expenses
You can claim a deduction for medical and dental expenses you incurred, but ONLY to the extent that they exceed 10 percent of your adjusted gross income (AGI). For example, your AGI is $50,000 and your medical expenses total $6,000. Since 10 percent of $50,000 is $5,000, you can only take a deduction of $1,000 (6,000-5,000). This threshold was previously 7.5 percent, but was increased to 10 percent in tax year 2013. Note, however, that the 7.5 percent threshold will remain in effect for those 65 and older for tax years 2013 through 2016.
Taxes You Paid
Certain taxes you pay are allowable as itemized deductions. To be deductible, these taxes must have been imposed on you personally, and you must have paid them during the year. These include the following taxes:
- State and local income taxes.
- Real estate taxes.
- Personal property taxes charged on the value of personal property.
- Foreign income taxes paid.
Interest You Paid
Home mortgage interest is the most common interest deduction, and this represents any type of interest that you paid on a loan secured by a main home or a second home. This also includes interest paid on a home equity line of credit (HELOC).
Gifts to Charity
You may claim as an itemized deduction any charitable contributions of money or property you made to qualified charitable organizations. Generally, you may deduct charitable contributions of up to 50 percent of your adjusted gross income. You may deduct a charitable contribution made to, or for the use of, any organization that is qualified under the Internal Revenue Code.
Casualty and Theft Losses
Generally, you may claim an itemized deduction for any casualty and theft losses you suffered relating to your home, household items, and vehicles. If your property was covered by insurance, you can deduct casualty and theft losses only if you filed a timely claim for reimbursement. Also, you must reduce the loss suffered, by the amount of any reimbursement you receive or expect to receive.
Job Expenses and Certain Miscellaneous Deductions.
If you are an employee with unreimbursed work-related expenses, you may be able to deduct them as an itemized deduction. Employee business expenses are subject to the 2 percent of AGI limitation (see below). You can deduct all unreimbursed employee business expenses incurred in the normal course of carrying out your responsibilities as an employee.
Other Miscellaneous Deductions
Deductible miscellaneous expenses are grouped into two separate categories. Some expenses are subject to the 2 percent of AGI limitation, meaning that they are deductible only to the extent that they exceed 2 percent of your adjusted gross income. There are others, however, that are not subject to the 2 percent limitation, and these can be deductible in full.
We shall review some of these itemized deductions in greater details in subsequent articles.