Income Tax Itemized Deductions on Schedule A
Saving Money by Reducing United States Taxable Income
Sep 14, 2009
On Form 1040, taxpayers add all income to Adjusted Gross Income. Then deductions are applied to arrive at Taxable Income. Taxpayers can choose between the greater of Itemized deductions or the Standard Deduction.
What are Itemized Deductions
The IRS allows taxpayers to itemize, or list, certain expenses paid for the tax year as deductions from income. These deductions are been specifically identified in the tax code as items that benefit the economy (such as home mortgage interest) or are of an unusual or extraordinary nature (e.g. large medical expenses).
For taxpayers filing a cash-based return (which most individuals file) it makes sense to time expenses to get the most possible in one year.
If in any year, the amount of itemized deductions is lower than the Standard Deduction, the taxpayer can choose the Standard. There are no penalties for switching from itemized to the Standard and back for any years.
The distinction between deductions and credits is important. Deductions reduce AGI to arrive at Taxable Income, and tax is calculated on Taxable Income. Credits directly reduce the tax owed.
Examples of Itemized Deductions
The following are some of the common items that can be deducted, subject to limitations
- Medical and Dental Expenses: If a taxpayer has large payments for healthcare expenses, there may be a deduction. The total must exceed 7.5% of Adjusted Gross Income (AGI), which for a taxpayer with AGI of $50,000, is $3,750. An inpatient hospital deductible, or dental work, (including braces for the taxpayer or dependent) may result in hitting this threshold.
- State and local income taxes: Most states have an income tax. Any taxes paid, either by check, credit card or payroll deduction can be deducted in the year they are paid. The taxpayer may also deduct sales taxes in place of state and local income taxes.
- Real estate taxes can be itemized based on when they are paid, not when they are put into escrow. Taxpayers should receive a tax form (usually Form 1098) documenting the payment.
- Home mortgage interest and points.
- Investment interest can be deducted, limited to the amount investment income on Form 1040. Excess investment interest can be carried forward to the following year.
- Charitable contributions: If the taxpayer receives a benefit, (donation to an event that includes a meal) then the deduction must be reduced by the value of the benefit.
- Casualty or theft losses.
- Other expenses subject to a limitation of 2% of AGI: As with medical expenses, certain expenses can only be deducted if they are substantial enough to be over 2% of Adjusted Gross Income. These include unreimbursed employee expenses, tax preparation fees and safe deposit box fees. For example, 2% of $50,000 is $1,000, so not many taxpayers will qualify, and a good strategy is to pay expenses to get the full benefit in one year.
The Internal Revenue Service provides additional guidance on their website. Taxpayers should always pay the tax that is owed within IRS rules.
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