Itemized deductions reduce taxable income, which results in lower taxes. Most individual taxpayers in the U.S. have the option of itemizing deductions instead claiming a standard deduction; this should be done if itemized tax deductions result in a greater tax benefit, considering state tax implications.
Who Should Itemize Tax Deductions?
Not all taxpayers will benefit from itemized deductions. Those who should itemize their deductions include:
- Individuals whose itemized deductions exceed their standard deduction. The standard deduction amount changes periodically. Current amounts can be found on the IRS website or in individual tax return instructions.
- Individuals who are not allowed to take the standard deduction. These include nonresident or dual-status aliens, anyone whose tax return covers less than twelve months, and anyone whose spouse is itemizing deductions on a separate return.
Types of Itemized Deductions and How to Claim Them
Federal itemized tax deductions fall into these categories:
- Medical and dental expenses
- Taxes paid (including state & local, real estate, personal property taxes)
- Interest paid (including mortgage interest)
- Charitable donations
- Casualty and theft losses
- Certain job expenses and miscellaneous deductions (including tax preparation fees)
Itemized deductions are reported on Schedule A and filed along with Form 1040. After all itemized deductions are totaled on Schedule A, individuals should take the final amount from Schedule A, Line 29 and enter it on Form 1040, Page 2, Line 40.
Choosing Between Tax Deductions: How to Quickly Determine If Itemized Deductions Are Better Than a Standard Deduction
To determine whether the standard deduction or itemized deductions results in a greater benefit, a side-by-side comparison can be done. Individuals should compute their allowable itemized deductions, considering potential adjusted gross income limitations, and see if the total exceeds the total standard deduction(s). Note: State deductions may differ from federal deductions, so state amounts should be taken into consideration in this comparison.
According to IRS Publication 17, the IRS indicates that individuals with the following circumstances may benefit from itemizing deductions (i.e. a greater tax savings than if the standard deduction is used):
- Incurred large uninsured medical or dental expenses during the year
- Paid interest and taxes on a home residence
- Had large unreimbursed employee business expenses
- Experienced uninsured casualty or theft losses
- Made large charitable contributions
Most Itemized Deduction are Limited to Adjusted Gross Income
All itemized deductions except casualty losses, dental and medical expenses, gambling or theft losses, and investment interest are subject to adjusted gross income limitations. What does this mean? This means that most itemized deductions (except the ones listed above) are phased out beginning at certain income levels. These income thresholds change periodically; annual thresholds are available on the IRS website.
Resources:
IRS website
IRS Publication 17, Form 1040, and Schedule A
Lena Gott - Lena Gott is a Certified Public Accountant who gives practical financial advice to her readers.
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