If so, you’ve come to the right place. I’m going to teach you the basics of itemizing: What itemizing is, whether or not you qualify to itemize and, if so, how to do it.
First, a quick note. Tax prep software can walk you through all potential deductions and even determine if it’s best to itemize or take the standard deduction. One of our favorites right now is TurboTax – you can file your simple federal return for free, and they’ll walk you through these itemized deductions so you can feel confident filing. You can start using Turbo tax by clicking here or read our full TurboTax review here
When you’re filling out your federal tax return this year, you’ll be asked to either calculate your itemized deductions or to take the standard deduction—an amount predefined by the IRS and based upon your filing status (e.g., single or married filing jointly). If you don’t qualify to itemize deductions, you will choose the standard deduction.
How to find your taxable income
To find your taxable income, you must subtract the standard or itemized deduction from your Adjusted Gross Income (AGI).
To be blunt, these deductions are our friends because they lower the amount of taxes that we have to pay.
What are itemized deductions?
Itemized deductions are comprised of various types of certain expenses that you incur throughout the year (things that are—surprise, surprise—“tax-deductible”).
If the total amount of these expenses is greater than the standard deduction amount, you should itemize instead of taking the standard deduction.
The most common expenses that qualify for itemized deductions include:
- Home mortgage interest
- Property, state, and local income taxes
- Investment interest expense
- Medical expenses
- Charitable contributions
- Miscellaneous deductions
Home mortgage interest
If you took out a mortgage to purchase a home, the interest on that mortgage is deductible as an itemized deduction.
Most people qualify for this deduction because it’s allowed on up to the first $1,000,000 borrowed on a mortgage. This deduction is allowed for two residences per taxpayer.
You can also deduct interest on a home equity loan as long as that loan is less than $100,000.
If you own a home, you can deduct the real estate taxes that you pay on your home. However, you cannot deduct prepaid taxes. You can only deduct those taxes which are allocated to the year in which you are filing your taxes for.
You can also deduct any state and local taxes (sometimes referred to as city tax) that you paid on your income during the year. This is a huge perk of itemizing (because most taxpayers pay state income tax but you can only deduct those taxes if you itemize deductions).
Investment interest expense
When you start investing, you may incur expenses like broker or advisor fees or safe deposit box fees. You can deduct these as itemized deductions.
Just be careful: You can only deduct up to the amount that you earn through your investments. So, if you had a bad year and didn’t earn anything, you cannot deduct these expenses. (However, you may be eligible for Capital Loss treatment.)
Medical expenses are deductible as itemized deductions, but in a very limited way. You can only deduct the amount of medical expenses that exceed 10 percent of your AGI (7.5 percent if you’re over 65).
For example, if your AGI was $50,000 and you spent $5,500 in medical expenses during the year, you could only deduct $500 ($50,000 x 0.1 = $5,000).
Some qualifying medical expenses include: Prescriptions, doctor’s fees/co-pays, insurance premiums, necessary surgery (not cosmetic), physical handicap costs, and transportation to a medical facility. You can also deduct 24 cents for every mile you drove for medical care.
If you were generous during the tax year and gave money or property to your favorite charity, you can deduct these gifts as an itemized deduction. Tithing to your church is included in this deduction.
Contributions to political campaigns or needy families are NOT included in this deduction. (You must donate to a qualified organization to claim the deduction). The deduction is only limited to 50 percent of your AGI for cash donations and 30 percent of your AGI for property donations.
There are some miscellaneous deductions that you can claim, but you can only deduct these expenses by the amount that they exceed two percent of your AGI.
These expenses include: Unreimbursed business expenses, qualified educational expenses, expenses for uniforms, tax preparation fees, business use of your home, subscriptions to professional journals, and job-hunting expenses. These are just a few, so consult the IRS Website if you have a question about one of your expenses.
How do you claim the itemized deduction?
When you’re filing out your 1040, you’ll see a question asking you to itemize or take the standard deduction towards the top of page two. You will need to use a separate form—Schedule A—to calculate your itemized deductions.
This form is on the IRS website along with your 1040 form. The Schedule A form will walk you through the steps and calculations of each expense that I listed above. You will take the final amount on the Schedule A form and put it into your 1040 form where it asks for itemized deductions.
Here are some helpful tips to summarize the itemized deductions process:
- Choose one or the other: Itemized deductions or the standard deduction.
- If you cannot itemize, you might be able to file a form 1040-EZ which is a shorter and simpler version of the traditional 1040 form. You may also be able to file your federal tax return using TurboTax absolutely free with the free edition.
- If you bought a house this year, there is a good chance that you will now be eligible to itemize.
Remember that no matter which deduction you choose, these deductions are your friend—they allow you to pay fewer taxes.
Once you get the hang of itemizing your deductions, start to keep detailed records of all your eligible expenses. This will help to make the tax process that much less painful.
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