Itemized Deduction

Itemized deductions are certain types of expenses that taxpayers can report on their federal income tax returns to lower their taxable income. Unlike the standard deduction, which is a fixed amount, itemized deductions allow taxpayers to list specific expenses and claim the actual amount spent on each item. This often results in a lower tax liability compared to taking the standard deduction, especially for taxpayers with substantial deductible expenses. Here, we will explore the various aspects of itemized deductions, including mortgage interest, charitable contributions, medical expenses, and more.

Mortgage Interest

One of the most significant itemized deductions is mortgage interest. Taxpayers who own a home and have a mortgage can deduct the interest paid on the loan. This deduction can be pivotal for many homeowners, as it may result in substantial tax savings.

The amount of mortgage interest that can be deducted is generally the amount reported on Form 1098, which lenders provide to borrowers at the end of each tax year. This form outlines the total interest paid and helps in calculating the deduction accurately. The IRS allows this deduction on loans secured by a primary residence or secondary home, up to certain limits.

However, recent tax law changes, such as those enacted by the Tax Cuts and Jobs Act of 2017, have modified the rules and limits related to mortgage interest deductions. As of 2018, the mortgage interest deduction limit has been set at interest on up to $750,000 of qualified residence loan amounts for loans taken out after December 15, 2017. Loans taken before this date still enjoy the previous limit of $1 million.

Charitable Contributions

Donations to qualified charitable organizations can also be itemized and deducted. These contributions include cash donations, property donations, and even out-of-pocket expenses incurred while doing work for a charity.

To claim this deduction, taxpayers must keep detailed records of their donations. For cash contributions, these records might include bank statements, payroll deduction records, and written communication from the receiving charity. For non-cash donations, a receipt from the charity is required. Taxpayers must also complete and file Form 8283 if the total deduction for all non-cash contributions exceeds $500.

There are limits on the amount that can be deducted. Generally, taxpayers can deduct up to 60% of their adjusted gross income (AGI) for cash donations, though lower limits apply for donations of property and certain other types of contributions.

Medical Expenses

Medical expenses are another category that can be itemized. These include a broad range of costs such as preventive care, treatments, surgeries, dental and vision care, prescription medications, and travel expenses related to medical care.

The IRS allows the deduction of medical expenses that exceed a certain percentage of a taxpayer’s adjusted gross income. For tax years 2017 and 2018, this threshold was 7.5% of AGI, meaning only the amount of medical expenses exceeding 7.5% of AGI could be deducted. As of 2019, this threshold increased to 10% of AGI.

State and Local Taxes

State and local taxes (often abbreviated as SALT) that can be itemized include state and local income taxes or sales taxes, as well as property taxes. Taxpayers can choose to deduct state and local income taxes or state and local sales taxes, but not both.

The Tax Cuts and Jobs Act of 2017 imposes a limit on the SALT deduction. As of 2018, the maximum amount that can be deducted is $10,000 ($5,000 if married filing separately). This cap affects many taxpayers, especially those living in states with higher taxes.

Casualty and Theft Losses

Taxpayers who have suffered financial loss due to theft or casualties, like natural disasters, may be able to itemize these losses. However, these deductions are subject to strict rules and limits. Net casualty and theft losses must be reduced by $100 for each event and are subject to a 10% of AGI limitation.

Moreover, after the passage of the Tax Cuts and Jobs Act, casualty and theft losses are deductible only if they occur in a federally declared disaster area.

Miscellaneous Deductions

Prior to the Tax Cuts and Jobs Act, taxpayers could also deduct unreimbursed employee expenses, tax preparation fees, and other miscellaneous expenses that exceeded 2% of their AGI. However, this deduction was suspended from 2018 to 2025.

Deduction Strategy

When deciding whether to itemize deductions or take the standard deduction, taxpayers should compare the total of all allowable itemized deductions to the standard deduction for their filing status. For tax years 2019 through 2025, the standard deduction amounts are significantly increased, making it beneficial for many taxpayers to opt for the standard deduction.

However, for those with high expenses in deductible categories, itemizing can still result in lower taxable income and tax liability. Carefully maintaining records and documentation for all potential deductions is essential in this process.

Tax Software and Professional Help

Given the complexity of itemized deductions, many taxpayers find it helpful to use tax preparation software or seek the assistance of a tax professional. Software products, like those from companies such as TurboTax (https://turbotax.intuit.com) or H&R Block (https://www.hrblock.com), provide user-friendly interfaces and detailed guidance on claiming deductions.

Tax professionals, including certified public accountants (CPAs) and enrolled agents (EAs), bring expertise and personalized advice that can be particularly valuable for complex tax situations.

Conclusion

Itemized deductions offer a powerful tool for eligible taxpayers to reduce their taxable income and, consequently, their tax liability. Understanding the various categories of itemized deductions – such as mortgage interest, charitable contributions, medical expenses, state and local taxes, and more – allows taxpayers to make informed decisions about their tax filings. With the help of careful record-keeping, tax software, or professional advice, taxpayers can navigate the complexities of itemized deductions to maximize their savings.