How Does an Itemized Deduction Affect a Personal Income Tax Return?

by Beverly Bird ; Updated August 02, 2018

Claiming deductions on your tax return reduces your taxable income, but you have a choice to make. You can either claim the standard deduction for your filing status or spend untold hours adding up every tax-deductible expense you paid all year, then claim the total instead of the standard deduction. An example of an itemized deduction is medical expenses. An accountant would tell you to claim whichever amount reduces your taxable income the most. The passage of the Tax Cuts and Jobs Act in December 2017 changes the big picture for some filers in the 2018 tax year, but the rules for the 2017 tax year – the return you file in 2018 – remain pretty much unchanged.

Differences Between Standard and Itemized Deductions

Itemizing deductions is an either/or proposition. If you itemize, you have to forego claiming the standard deduction for your filing status. The expense you’re claiming must fall into one of several categories, including mortgage interest, property taxes, state and local taxes, charitable donations, casualty and theft losses, some work-related expenses and medical expenses. For example, the deduction for medical expenses is limited to those that exceed 10 percent of your adjusted gross income in 2017. If your AGI is $75,000, you can only claim an itemized deduction for the portion over $7,500. Many work-related expenses are subject to a similar limitation, but in such cases you can deduct the portion that exceeds 2 percent of your AGI. Two out of every three filers go with the standard deduction.

How to Claim the Deduction

If you’ve determined that you’re going to itemize, the first order of business is to define the itemized deduction, then complete Schedule A and total up all your expenses in each itemized category. Save your receipts in case any of them are ever called into question. Next, use Form 1040 tax return, not 1040A or 1040EZ – you can’t claim itemized deductions on the latter two short forms. Enter the total of your itemized deductions from Schedule A on line 40 of Form 1040. This line appears in the Taxes and Credits section and is subtracted from your adjusted gross income to arrive at the amount of income you must pay taxes on. The less income you have that’s subject to taxation, the less you’ll pay in taxes.

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The Effect of Phase-Outs

Not every taxpayer has the option of saving taxes with itemized deductions. Some are subject to phase-outs, also called “Pease limitations” after the politician who first conceived of them. When your income reaches a certain threshold, the itemized deductions available to you are gradually reduced and, eventually, eliminated entirely. For tax year 2017, those thresholds are $261,500 if you’re single, $287,650 if you qualify for head of household filing status, $313,800 if you’re married and file a joint return, and $156,900 if you’re married but you and your spouse file separate returns.

Changes in Tax Year 2018

The Tax Cuts and Jobs Act pretty much doubles the standard deduction, so you’re going to need a lot more itemized deductions in 2018 to add up to more than these standard amounts. It might be more advantageous for you to claim the standard deduction instead. The threshold for claiming itemized medical expenses drops from 10 percent to 7.5 percent of your AGI in 2018, but itemized deductions for property, state and local taxes are capped at $10,000 under the terms of the TCJA. You can only claim casualty and theft losses if they’re the result of a national disaster declared by the president. And work-related expenses that used to be subject to the 2-percent-of-AGI rule have been eliminated.

About the Author

Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.

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