What itemized deductions, List, When, and How

What do itemized deductions mean

An itemized deduction is any certain expense (on tax-privileged items) that a taxpayer is allowed to deduct against their Adjusted Gross Income (AGI) during a tax year. It’s essentially a list of expenses you can use to reduce your taxable income.

When filing the federal tax return, a taxpayer has either of these two options:

1. Claim the standard deduction. This is a flat amount (determined by the IRS and based on a taxpayer’s filing status) that can be claimed by a taxpayer on their return.
2. Itemize their deductions. Itemized deductions that have been spent on certain deductible expenses. The total of the itemized deductions will be entered on Form 1040 and Schedule A attached to the tax return.

Qualified purchases or expenses (tax-privileged items) include;

• Unreimbursed Medical expenses,
• Taxes (state and local income or sales taxes, real estate taxes, personal property taxes)
• Disaster loses
• Home Mortgage Interest
• Home-Equity Loan (or Line of Credit) Interest
• Donations to charity
• Casualty and theft losses(as a result of a federally declared disaster), and
• Unreimbursed Job-Related Expenses
• Certain miscellaneous itemized expenses

Tax deductions are subtracted from the income when computing income tax owed hence less tax. These deductions tend to exceed the standard deduction hence a huge reduction in tax bills.

When to itemize deductions

The rule of thumb is;

• Choose the deductions that let you minimize taxes. The decision to itemize or take the standard deduction should be based on the size of each deduction.
• Not to choose to itemize deductions if the amount of tax saved is not worth the effort. Itemizing deductions takes a bit of work because a taxpayer must account for every expense deducted and records of these expenses properly kept (needs to be availed in case of an audit.

List for itemized deductions

Itemized deductions limit

Unreimbursed Medical and Dental Expenses

Taxpayers can deduct any qualified out-of-pocket medical expenses (Medical, dental, prescription drugs, and other health care costs not covered by a Health cover) including some insurance premiums that exceed 7.5% of their AGI.

Long-Term Care Premiums

A taxpayer can deduct Long-term care premiums (deduction limit is based on a taxpayer’s age) paid to qualified insurance to the extent that it exceeds 10% of an individual’s AGI).

Home Mortgage interest

Home mortgage interest is deductible on the first $750,000 ($1 million if the mortgage originated before Dec 16. 2017-this limitation will disappear in 2025).

Taxpayers who bought or refinanced homes in that tax year are also allowed to deduct Home mortgage points paid (but within certain guidelines).

Mortgage lenders are required to mail Form 1098 to borrowers (this details the exact amount of deductible interest and points paid over that past tax year)

Home-Equity Loan or Line of Credit Interest

Home-equity loan/line of credit interest is a deductible expense provided the funds were used to buy, build, or substantially improve the home (remodeling not eligible.) that secures the loan.

Taxes Paid

Taxpayers are allowed to itemize and deduct;

• Personal property taxes, including real estate taxes
• State and local taxes that were assessed for the previous year.

Please note;

• Previous year’s Refunds must be counted as current income if the taxpayer had itemized deductions in the previous year.
• Prepaid local or state income tax is not deductible in the current year’s return.
• Taxpayers are limited to deductions of up to up to $10,000 for individuals and up to $5,000 for married taxpayers who file separate returns (for the tax year 2018 to 2025).
• Any foreign real estate taxes that are not related to a trade or business are not allowed as a tax deduction.

Charitable Donations

• Cash Donations made to a qualified charity are deducted up to 60% of the taxpayer’s AGI (between the tax year 2018 and 2025). Amounts beyond the stipulated limit must be carried over to the next year.
• Contributions to non-qualified charities can be limited to up to 50%, 30%, or 20% of the taxpayer’s AGI, and will depend on the type of property and organization receiving it.
• The CARES Act, which was signed into law on March 27, 2020(and expired as of March 27, 2022.), created a new above-the-line deduction (for both cash and food donations) of up to $300 and relaxed limits on other charitable deductions to counter COVID-19 pandemic.

Casualty and Theft Losses

• Casualty or theft loss incurred (as a result of a federally declared disaster) is tax deductible. However, only losses above 10 %( after subtracting $100) of the taxpayer’s AGI are deductible.
• Only casualty losses not covered by insurance are eligible
• Reimbursements on casualty loss that had been reported in a previous return must be counted as income in the current tax year.
• Taxpayers must complete Form 4864 and report the loss on Schedule A.

Unreimbursed Job-Related Expenses and Certain Miscellaneous Deductions

Workers falling into the categories below can deduct their job-related expenses that exceeded 2% of their AGI (This is completed on Form 2106).

• Armed forces reservist,
• Qualified performing artist,
• State or local government officials working on a fee basis, or
• Employees with impairment-related work expenses.

Eligible educators are eligible for a further deduction of $250 in unreimbursed expenses. This is done by completing Schedule 1

Other Miscellaneous Deductions

This includes;

• Gambling losses that offset gambling income
• Investment interest on borrowing money to purchase an investment.  This is limited to the amount of taxable investment income you earn each year excluding capital gains or qualifying dividends. Any disallowed investment interest can be carried over to future years.

How do I itemize deductions

IRS simply requires the taxpayer to provide an itemized list of what they spent their cash on — In exchange, it lets them deduct some of those expenses against the taxable income. This is how to go about it;

• Use Form 1040: Schedule A to calculate your itemized expenses. This will help determine the deductible expenses and their limits.
• Submit the form with your tax return to claim the deductions that you’ve itemized if you want to itemize.
• Keep a record of all receipts itemized. IRS will require them during tax audits.

If you decide not to itemize, don’t submit the form and instead choose the standard deduction.

Form for itemized deductions

A taxpayer is supposes to itemize this deductions on Schedule A of Form 1040. The form looks like this:

Bottom line

A taxpayer must need to an election and file a return to qualify for itemized deductions. The election is no longer available if the IRS happens to prepare a substitute return for the delinquent taxpayer for a certain tax year.

Itemizing deductions will only benefit a taxpayer if the amount of the deductions exceeds your standard deduction, and the effort of itemizing the expenses is worth the savings!

The Tax Cuts and Jobs Act removed many eligible deductions (running from 2018-2025). It only removed this deductions in respect of individual taxes. These expenses include;

• Unreimbursed job expenses.
• Investment Expenses (for personal investing e.g. Investment advisor fees)
• Tax preparation fees.
• Fees incurred when fighting the IRS.
• Hobby expenses.