Each year, taxpayers are faced with a dilemma: to claim the standard deduction or itemize. If your write-offs don't exceed your standard deduction, it doesn't make sense to itemize. In most cases, itemized deductions are use-them-or-lose-them deductions, so if you don't itemize, you miss out on the deduction. However, certain charitable deductions and investment interest are treated differently.
Besides certain charitable donation and investment interest deductions, you're not allowed to carry forward other itemized deductions. For example, say that you buy a house in November so you pay a little mortgage interest, but it's not worth itemizing because you're only paying a fraction of a year's interest. You can't add that interest to your mortgage interest deduction the following year.
Though you can't carry forward itemized deductions, you might be able to time some of your expenses so that you can pick which year you get to write them off. For example, medical expenses are deductible in the year you pay them, regardless of when you actually receive treatment. So, if you already have substantial medical expenses this year so that you'll exceed the 10 percent threshold, and a big procedure coming up in January, consider prepaying in December so you can add it to your expenses for the current year.
Though the limits don't come into play very often, the IRS does cap how much you can claim in charitable donations every year at 50 percent of your adjusted gross income. If you exceed the limit, you can carry forward the excess contributions for up to five years. For example, say you give $50,000 to charity but your AGI is only $60,000. You can deduct $30,000 the first year and carry forward the remaining $20,000 to the next tax year.
Investment interest refers to money that you borrowed to -- you guessed it -- invest. It can be stocks, land, rental homes or other investments, but your deduction is limited to your net investment income for the year. For example, if you pay $1,500 of interest on a loan but you only have investment income of $500, you can carry forward the last $1,000 to the next tax year that you have investment income to cancel out.
- Internal Revenue Service: Topic 501 -- Should I Itemize?
- Internal Revenue Service: Publication 526 -- Charitable Contributions
- Intenral Revenue Service: Topic 505 -- Investment Interest
- Internal Revenue Service: Publication 502 -- Medical and Dental Expenses
- Internal Revenue Service. "About Form 2106-EZ, Unreimbursed Employee Business Expenses." Accessed Nov. 22, 2019.
- Internal Revenue Service. "Topic No. 551, Standard Deduction." Accessed Nov. 23, 2019.
- Internal Revenue Service. "Topic No. 501, Should I Itemize?" Accessed Nov. 23, 2019
- Internal Revenue Service. "Publication 526 (2018), Charitable Contributions." Accessed Nov. 23, 2019.
- Internal Revenue Service. "2018 Instructions for Schedule A (Form 1040)." Accessed Nov. 23, 2019.
- Internal Revenue Service. "Topic No. 511, Business Travel Expenses." Accessed Nov. 23, 2019.
- Internal Revenue Service. "Publication 502 (2018), Medical and Dental Expenses." Accessed Jan. 29, 2020.
- Internal Revenue Service. "Topic No. 409, Capital Gains and Losses." Accessed Nov. 23, 2019.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."