Itemized Deductions - What are they?
For many, the itemized deduction has gone the way of the dodo bird. Since the Tax Cuts & Jobs Act (TCJA) of 2017, the personal exemption was eliminated, and the standard deduction was increased so much that many people are no longer able to benefit from itemizing deductions. See my previous post on the anatomy of a tax return for a quick recap on some of these terms.
Even though many people are not able to take advantage of itemized deductions anymore, it is still worthwhile to run through the itemized deductions each year to see if you qualify. There are a few big buckets, so it does not take much time to determine what your itemized deductions would be.
Here are the big categories if you want to jump to one in particular:
Medical and Dental Expenses
Before diving into this section, it is worth noting that medical and dental expenses are only deductible in excess of 7.5% of Adjusted Gross Income (AGI). So before starting here, you will need to have at least a rough idea of your AGI. Then multiply that figure by 7.5%. Any medical and dental expenses in excess of that amount could be deductible.
Let's say your AGI is $60,000. Multiply that figure by 7.5%, and you get $4,500. This is your threshold. If you later figure that your deductible medical and dental expenses are $5,000, you would be able to deduct $500 ($5,000 total expenses, less the threshold of $4,500).
What is deductible?
Here are some examples of potentially deductible expenses. As a general rule, you cannot include any expenses that were reimbursed or paid for using pre-tax dollars.
Insurance premiums - Note that these can only be deducted when you are not already receiving preferential tax treatment. For example, if you are an employee, and your paystub shows insurance premiums as a before tax deduction, you can not include this because you are already using pre-tax dollars to pay for that expense. Likewise, self-employed individuals who claim a self-employed health insurance deduction would have to reduce this deduction by that amount.
Prescription medicines or insulin - Do not include any expenses paid by an HSA, FSA, HRA, etc.
Amounts paid to doctors and medical practitioners - examples include acupuncturists, chiropractors, dentists, eye doctors, medical doctors, occupational therapists, osteopathic doctors, physical therapists, podiatrists, psychiatrists, psychoanalysts (medical care only), and psychologists.
Medical exams, x-ray and lab services
Qualified long-term care services - Note that for long-term care insurance premiums there is a limit based on the age of the person covered. See IRS publication 502 for more information.
Supplemental part of Medicare insurance (Part B)
Medicare Part D premiums
Smoking cessation programs
Weight-loss programs as treatment for a medical condition diagnosed by a doctor
Medical aids like eyeglasses, contact lenses, hearing aids, braces, crutches, wheelchairs, and guide dogs, including the cost of maintenance
Corrective eye surgery
Lodging expenses (but not meals) to receive care away from home - This is limited to $50 per night for each person who qualifies
Ambulance service and travel expenses to get medical care - If you used your own car, you can either take actual expenses for gas and oil or you can claim the medical standard mileage rate (note that this is lower than the business mileage rate most people are used to). You can also include the cost of parking and tolls.
Breast pumps and supplies used for lactation
What is NOT deductible?
The following examples are not allowed to be included as a deduction.
Cosmetic surgery that is not medically necessary
Life insurance or income protection policies
Drugs not approved by the FDA
Funeral, burial, or cremation costs
Whose expenses can be included?
You can include expenses for any of the following.
Yourself and your spouse
All dependents claimed on your return
Your child you don't claim because of the rules for children of divorced or separated parents
A person you could have claimed as a dependent except that person's gross income was too high or they filed a joint return
A person you could have claimed as a dependent except that you or your spouse can be claimed as a dependent on someone else's return.
Taxes You Paid
The most common deductions in this section are the state and local taxes. All three categories (income tax, real estate tax, and personal property tax) are collectively limited to $10,000, or $5,000 per return if married filing separately. For the most part, federal taxes are not deductible.
State and Local Income Taxes or General Sales Taxes
This section allows you to choose whichever option would be more advantageous for you.
State and Local Income Taxes
If you choose to do the state and local income tax, this includes any amount withheld for you or paid during the tax year, including payments for prior tax years. This also includes mandatory contributions to worker's compensation, unemployment, and paid family leave programs in certain states.
State and Local General Sales Taxes
If you choose to take general sales tax instead, you have two options on how to calculate this: actual expenses or optional sales tax tables.
To take the actual expenses option, you must have kept actual receipts showing the general sales taxes paid.
Optional Sales Tax Tables
This simplified option allows you to look up an allowance in a table based on income and family size. In addition to this allowance, you may include sales taxes paid on certain specified transactions, including a motor vehicle, aircraft or boat, and a home or substantial addition or renovation.
State and Local Real Estate Taxes
Real estate taxes, often called property taxes, are those you pay for your non-business real estate. If your home is mortgaged and your property taxes are paid through escrow, this amount is typically included on the form 1098 you receive from your mortgage lender at the end of the year. If you pay your taxes on your own, you would have to refer to information provided by the tax authority.
If you bought and/or sold a home during the tax year, you can find information regarding property taxes paid in the process of the sale on the settlement statement. This can affect the amount that can be deducted.
Property taxes for a house were $2,000 for the year. The seller had already paid these taxes. When the house is sold, the buyer pays $500 in property taxes to cover the remainder of the year between when the house was purchased and the end of the year. The buyer can include this $500 as a deduction in this section.
The seller had already paid the full property taxes of $2,000 for the year, so she must reduce her deduction by the $500 that is refunded to her through the settlement. This means she can deduct $1,500 for that house for the year.
State and Local Personal Property Taxes
Some states and localities assess taxes on personal property. If the taxes are assessed yearly and based on the value of the item, it can be included here.
In rare cases, there may be other taxes that can be deducted. These could include foreign taxes and generation skipping taxes (GST). However, if there are foreign taxes, you would also want to look at the foreign tax credit to see if that would be more advantageous.
Interest You Paid
The most common type of interest is home mortgage interest. This also includes points paid on mortgage, and mortgage insurance premiums. Typically, all of these items are reported to you on the form 1098 you receive from your mortgage lender each year. Note that mortgage insurance premiums are limited if your AGI is too high. See the instructions for Schedule A for more information.
Another less common deductible interest is investment interest. This is interest paid on money you borrowed for property held for investment, but not including passive activities or securities that generate tax-exempt income.
Gifts to Charity
Contributions or gifts to religious, charitable, educational, scientific, or literary organizations can be deducted. To verify that an organization qualifies, you can check with the organization directly, as they should be able to provide you with verification of its charitable status. You can also search the IRS's online tool at irs.gov/teos.
Contributions include cash, property, or out-of-pocket expenses you paid to do volunteer work. Unreimbursed travel expenses can be deducted at either the actual cost of gas and oil or the charity standard mileage rate (note that this is lower than the business mileage rate most people are used to). You can also include the cost of parking and tolls.
Note that you can only deduct gifts to the extent you received no benefit. For example, if you paid $150 for a charity dinner, and the value of the meal itself is $50, you may only deduct $100.
Donations of personal property are valued at the fair market value. For example, if you are donating clothing or furniture, think how much you could receive by selling those items at a garage sale. That is the amount that can be deducted when you donate them. Certain large contributions such as a motor vehicle or a boat require a statement from the charitable organization, or even an official appraisal depending on the value of the item donated.
Certain contributions and gifts are limited when the total exceeds 20% of AGI. If this is the case, more details on the limitations can be found in IRS publication 526.
Casualty and Theft Losses
The casualty and theft losses deduction has been greatly reduced in recent years. This deduction now only applies to losses related to federally declared disasters. Furthermore, only individual losses in excess of $100 may be included, and the total of these losses is subject to a threshold of 10% of AGI.
Other Itemized Deductions
In some instances, there are other itemized deductions. These are more rare, and are limited to the following situations:
Gambling losses - limited to the amount of gambling winnings reported as income
Casualty and theft losses from income-producing property
Federal estate tax on income in respect of a decedent
Amortizable bond premium
Ordinary loss for a contingent payment debt instrument or an inflation-indexed debt instrument
Repayment of amounts under a claim of right over $3,000
Unrecovered investment in a pension
Impairment-related work expenses of a disabled person
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