An Overview of Itemized Deductions: Definition, How to Claim & Limitations

An Overview of Itemized Deductions: Definition, How to Claim & Limitations
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Claiming itemized deductions could be a suitable alternative to taking the standard deduction for your filing status if you're looking for a way to cut down your tax bill. You can claim qualifying expenses you paid all year rather than a certain guaranteed amount if you meet the Internal Revenue Service rules for each. Deductions reduce your taxable income so you pay tax on less.

Understanding Itemized Deductions

When determining your taxable income, the IRS adds up all your income sources then accounts for above-the-line deductions first to get you a lower adjusted gross income. These include things like education expenses and certain retirement contributions.

After that, you have below-the-line tax deductions that are subtracted from your adjusted gross income to get you a lower taxable income subject to federal income tax. Your Medicare and Social Security taxes don't change.

Itemized deductions are included in the below-the-line deduction category. They let you claim tax savings for expenses such as out-of-pocket medical care, mortgage interest, property taxes, charity gifts, various state and local taxes and various other types of interest. The amount you can deduct is personalized to your tax situation and the expenses you can show for the year. The IRS sets rules for when and how you can deduct such costs, so not everybody qualifies.

Figuring all your itemized deductions can be difficult, but the IRS provides Schedule A that lists many common deductible expenses and walks you through calculations for each. Claiming itemized deductions often requires consulting other tax forms you've received and it may even require additional IRS forms to figure the total amounts. It also means keeping close track of receipts, bank statements, credit card statements and other documents to back up your claims.

Itemized deductions are included in the below-the-line deduction category and help you get tax savings for expenses such as out-of-pocket medical care, mortgage interest, property taxes, charity gifts, various state and local taxes and various other types of interest.

Comparing to the Standard Deduction

The standard deduction serves as the very popular alternative to itemizing. You can claim a large deduction with far less work than itemizing requires and without the need to have incurred any special expenses. This option is usually available to you unless your spouse itemizes, you're a special entity like a partnership or trust, or you have an alien status.

You get the same effect as itemizing in that the deduction lowers your taxable income, and you don't have to fill out Schedule A. But keep in mind you can't claim your itemized expenses if you go with this option. It's an either/or decision. You can itemize or you can claim the standard deduction, but you can't do both.

Single taxpayers can claim a ​$12,550standard deduction for tax year 2021, the return you'll file in ​2022​. Those who are married and filing separate returns can also claim ​$12,550​. This doubles to ​$25,100​ for married couples who file jointly, and it goes up to ​$18,800​ for those who qualify for the head of household filing status. But special rules apply to dependents, the elderly and the blind. Dependents can get as little as ​$1,100​, while the other groups can get between ​$1,300​ and ​$1,650​ extra.

Popular Types of Itemized Deductions

You can only deduct qualifying expenses when you itemize, and there are limits to some and calculations are often required. Some popular itemized deductions include:

  • Charity contributions​: The IRS encourages giving to charities by letting you deduct up to a portion of your AGI for cash and non-cash donations. You must make sure the charity is approved by the IRS and keep all documentation supporting your gifts. You may need an appraisal to help determine value in some cases. Deduction limits normally range from ​30 to 60 percent​ of your AGI, but the Coronavirus Aid, Relief and Economic Security Act has included some temporary changes. You can claim up to ​100 percent​ of your AGI in tax year ​2021​ if you donate cash, and taxpayers who don't itemize can even deduct ​$300​ as an above-the-line deduction. This increases to $600 if you're married and file a joint tax return.
  • Dental and medical expenses​: The IRS allows you to itemize medical and dental expenses for you, your spouse and your dependents as they're not reimbursed by insurance and you can meet a threshold based on your adjusted gross income. Your total expenses must be more than ​7.5 percent​ of your 2021 AGI. Your deduction is the amount that exceeds that number. Let's say you had a $20,000 bill for surgery, and 7.5 percent of your AGI is $10,000. You can claim $10,000 of the medical expense as an itemized deduction.
  • Mortgage interest​: You should receive a Form 1098 from your lender showing the home mortgage interest you paid over the course of the year. You can deduct this amount as long as you're the owner and you meet the IRS limits based on mortgage debt and filing status. Taxpayers who bought homes before ​December 15, 2017​ can deduct the interest they paid on the first ​$1,000,000​ in mortgage debt. This limit drops to ​$500,000​ for those who are married and file separate returns. Those who bought their homes after this date can claim the deduction for up to ​$750,000​ in mortgage debt unless they're married and filing separately, which would cut the limit to ​$375,000​. You may also be able to deduct your property taxes.
  • Casualty and theft losses​: This deduction could help you if a federal disaster declared by the President has led to a personal property loss, but some complicated rules apply. There's a ​10 percent AGI​ threshold for the loss and you must subtract ​$100​ from the loss amount.
  • Various taxes​: The IRS places a ​$10,000​ limit (​$5,000​ for taxpayers who are married filing separately) on deductions for various types of state and local taxes. You can deduct up to this amount in property taxes and local and state income taxes or you can deduct sales taxes you paid over the year, but you can't deduct both. This is another either/or decision.
  • Private mortgage insurance​: The IRS lets you deduct private mortgage insurance for mortgages entered into on Jan. 1, 2007 or later. Income limits apply before this PMI deduction begins to phase out and is ultimately eliminated entirely. The deduction reduces for those filing as single, heads of household or married filing jointly at a ​$100,000​ AGI as of tax year 2021. They can't claim this deduction with an AGI of more than ​$109,000​. The limits are half these amounts for married taxpayers filing separately.
  • Gambling losses​: Whether you've lost money playing the lottery, poker or casino games, you can deduct losses and even carry them forward if necessary. But keep in mind that you must also report your gambling winnings as income, and the IRS doesn't let you deduct more than you won. You may win $1,000 and lose $10,000, but you can only deduct the $1,000.

Knowing Whether to Itemize

Deciding to itemize can be a simple or difficult process depending on your tax situation. You have no other option if you're married and filing separately and your spouse itemized, or if you fall into one of the other categories of people excluded from taking the standard deduction. It can also be an easy decision if you checked your standard deduction amount and knew right away you've incurred expenses beyond that figure.

The IRS recommends going ahead and filling out Schedule A when the answer is less clear. See what number you end up with for your total itemized deductions. Itemizing makes sense if it's more than the standard deduction for your filing status. Otherwise, you'd pay tax on more income than you have to if your standard deduction is more than the total.

Itemized deductions can be complex, so it can be helpful to consult a tax professional to determine if it's the right choice for you. Online tax preparation software can point you to the better deduction option if you answer the questions presented.

Claiming Itemized Deductions

Claiming the standard deduction or your itemized deductions is as simple as putting the amount on ​line 12a​ of your 2021 Form 1040. Complete Schedule A to arrive at the total of your itemized deductions. The IRS provides instructions that walk you through each section and deduction category. The guide also includes worksheets that help you figure out the amounts for individual deductions.

Here's a basic walkthrough of what you'll find on Schedule A:

  • Form header​: Enter your legal name and Social Security number here.
  • Medical and dental expenses​: This section asks you to enter your total unreimbursed dental and medical expenses, transfer over your adjusted gross income, use the ​7.5 percent multiplier​ and subtract to get the amount that qualifies based on your income.
  • Taxes you paid​: There are several lines where you enter state and local income taxes, real estate taxes, property taxes or sales taxes. These are subject to either ​$5,000 or $10,000 limits​ based on your filing status, so you can do the math to determine the smaller amount. You can then add additional qualified taxes to get the total you can deduct.
  • Interest you paid​: This section covers mortgage interest and points for which you may or may not have received a Form 1098. It also addresses investment interest and mortgage insurance premiums; these may require using a worksheet or completing an extra form to figure. You get to total all of these.
  • Gifts to charity​: Following the IRS guidance on which contributions qualify, how much you can deduct and which need additional documentation, you enter the amounts for cash and noncash gifts along with any carryover you have from a past tax year to get a total charitable contribution deduction.
  • Casualty and theft losses​: You must first fill out the first page of Form 4684 with information about your property and the federally declared disaster that led to a loss. You'll get your final number on ​line 18​ and you can transfer that over to this section on Schedule A.
  • Other Itemized Deductions​: You get a few lines to declare the amounts for other types of deductions, such as unrecovered investments and gambling losses.
  • Total Itemized Deductions​: You get your financial itemized deduction amount for ​line 17​ after adding up the totals for each category. You can then transfer this amount to line 12a of your Form 1040 tax return. The IRS wants you to check the box for ​line 18​ if the standard deduction amount exceeds your itemized deductions but you still want to itemize anyway.