The Facts on Itemized Tax Deductions

An itemized tax deduction is a type of eligible expense that an individual taxpayer has a incurred and may report on their federal income tax returns so that the amount of the individual's taxable income may be reduced. An itemized tax deduction is an alternative option for a taxpayer to choose, as opposed to the standard deduction. When filing taxes, a taxpayer may compute the adjusted gross income and discover the amount of itemized tax deductions, which can be subtracted from the gross income to calculate the total amount of taxable income. Next, the taxpayer may use the standard deduction method to compute the amount of taxable income. Whichever method yields the greater amount of deductions will generally be the method chosen by the taxpayer when the tax return is filed.

What are Allowed for Itemized Tax Deductions?

There are a number of itemized tax deductions which may be included in a tax return to reduce the amount of taxable income of an individual:

Medical expenses are eligible to be included in itemized tax deductions, up to a certain amount. The amount of eligible medical expenses is calculated by determining 7.5 percent of a taxpayer's gross adjusted income and subtracting it from the total medical expenses. Medical expenses which are eligible for inclusion are:

Payments to doctors, dentists, physical therapists, psychologists, health care professionals, etc.;

Premiums of medical insurance;

Payments for prescription medication;

Travel expenses for transport to medical facilities for treatment, including mileage;

Non-deductible medical expenses, such as health club memberships;

Taxes, both state and local. These include:

Income taxes;

Property taxes;

Mortgage interest expense on debt which has been incurred on up to two homes;

Investment interest, up to the amount of income returned from such investments;

Charitable Contributions to recipients that are eligible. The deduction is allowable between 30 to 50 percent of the adjusted gross income, depending on the recipient. Though goods and money are accepted for itemized tax deductions, services are not, except for expenses incurred for performing such services. Charitable contributions eligible for itemized tax deductions generally are given to:

Churches, synagogues and other houses of worship;

Federal, state, or local government organizations;

Fraternal or veteran organizations;

Individuals and political contributions are not included as a tax deductible contribution.

Losses that have been incurred due to theft or casualty to the extent that the losses exceed 10 percent of a taxpayer's adjusted gross income.

Losses incurred due to gambling to the extent of the amount of total income created due to gambling winnings.

Miscellaneous Itemized Tax Deductions:

Miscellaneous itemized tax deductions differ from typical itemized deductions because miscellaneous deductions have a 2 percent minimum. This means that a taxpayer can only deduct miscellaneous itemized deductions that total at least 2 percent of their adjusted gross income. Any deduction not listed in 26 U.S.C. § 67(b) is considered to be a miscellaneous itemized tax deduction. These usually include:

Clothing and equipment which has been purchased for job-related activities, such as hardhats and uniforms. Suits and tuxedos are not eligible for deduction;

Subscription memberships to newspapers, magazines and other periodicals for purposes relating to a job;

Union dues.

Standard Tax Deduction and Itemized Tax Deduction Comparison:

Not everyone is eligible to choose between itemized tax deduction and standard tax deduction. Only taxpayers who meet certain requirements may choose the standard tax deduction method. The taxpayer must be either a citizen of the United States or a resident alien to be eligible for a standard deduction. If the taxpayer is a nonresident alien, he or she will not be able to choose the standard method. When a married couple files their tax returns, if they are filing separately, if one spouse chooses the itemized tax deduction method, the other spouse will not be eligible to choose the standard method. Instead the spouse should either choose itemized tax deduction or claim a "0" for the calculated total of the standard deduction. In addition, itemized tax deductions require prior records to be maintained to prove their validity.

When a taxpayer has calculated the total amount of taxable income when using both the itemized tax deduction and standard tax deduction methods, the two differing totals should be carefully analyzed. Even if choosing the itemized tax deduction method yields a more beneficial return for the taxpayer, if the difference is negligible between the itemized and standard totals, it may be wiser to choose the standard method. The reason this should be considered is because the Internal Revenue Service (IRS) may disagree with the itemized total, and may make changes that reduce the amount of return. A standard deduction will not be adjusted by the IRS unless a taxpayer's filing status is changed.

NEXT: Understanding Tax Exemptions