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How Itemized Deductions Work

How Itemized Deductions Work - TaxACT Blog

The IRS isn’t cruel. It doesn’t want to tax every last cent you earn. In fact, it offers a standard deduction — a gift! — to all taxpayers based on their filing status.

For the 2014 tax year, the standard deduction for a single filer under the age of 65 can automatically deduct $6,200 from their taxable income, and a married couple filing jointly can deduct $12,400 ($6,200 married filing separately).

But, depending on your finances, you may be able to lower your tax burden even further if you itemize deductions.

Written into the tax code are allowances for all kinds of deductible expenses.

When you choose to itemize deductions on your federal income tax return (the famous 1040), you attempt to claim legal deductions that add up to more than the standard deduction, giving you a bigger refund (or a smaller amount to pay).

This requires careful financial recordkeeping and a close reading of the tax rules, but it can pay off come April 15.

There are dozens of itemized deductions available, but here are a few of the most common deductions claimed by American families:

Mortgage interest

This is a real benefit for homeowners whose monthly mortgage checks include huge chunks of interest. By itemizing deductions, you can deduct 100% of the mortgage interest you’ve paid.

State and local taxes

This one makes sense; why should the federal government tax you on earnings that you’ve already spent on state and local taxes?

In the seven states that don’t have income tax, residents can choose to deduct sales tax instead.

Charitable gifts and donations

As a way of rewarding charitable giving, the IRS lets taxpayers deduct the cash value of donations given to charitable, tax-exempt organizations.

The total charitable giving deduction is capped at 50% of adjusted gross income (AGI).

Medical and dental expenses

The IRS recognizes the high cost of health care and allows a partial deduction of out-of-pocket medical expenses (not health insurance premiums).

The deduction covers the portion of medical expenses that exceed 10% of your income (7.5% if you’re over 65).

Other deductible expenses

You can also deduct certain unreimbursed job expenses, theft and casualty losses, tax preparation fees, and gambling losses.

The generosity of the IRS does have its limits, though. The tax code applies floors, ceilings and phase-outs for certain itemized deductions.

Floors set a minimum amount at which you can start deducting certain expenses, like medical expenses in excess of 10% of AGI. That 10% is the floor.

There’s a whole category of miscellaneous expenses that only count if they amount to greater than 2% of AGI.

Ceilings impose a limit on certain categories of itemized deductions, like the limit on charitable deductions to 50% of AGI.

You can only deduct 50% of the cost of business-related meals and entertainment, and gambling losses cannot exceed gambling winnings.

The phase-out of certain itemized deductions is reserved for the highest income earners.

For tax year 2014, the phase-out begins for individuals earning $254,200 or couples earning $305,050.

The phase-out applies to most of the popular itemized deductions, including mortgage interest, charitable donations and taxes paid.

If your income exceeds those thresholds, the total amount of itemized deductions you can claim is lowered by 3% of every dollar over the limit, up to a maximum 80% reduction.

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  1. Tony henry says:

    Bought a house in Illinois in Ovtober. But my final move from Washington state didn’t happen until end of November. No I didn’t work in December in the state of Illinois , so I won’t have any state income tax for Illinois

    Buying the Illinois house straight up – no mortgage loan. – is there any deduction for bring 1st time home owner , similar to the 2008 home credit. Is that program still available ?

  2. As a returning, customer for a few years, I’m thinking of trying a different tax product next year because I’m so fustrated because the active time is so short
    that I’m always being automatically logged off and then I have to log in again and again.

    I know that this some sort of safety feature but you don’t give me enough time to look something up before I’m kicked off. I’m not talking hours here, but not entering a key stroke after a few minutes, I’m kicked off.

    Manuel Sousa

  3. You say health premiums are not deductible as a medical expense but I have read they are. Is it
    Only if you are 65 & older?

  4. Robert Jacobs says:

    I normally file Federal and NY State tax returns. However, in May 2014, my son (who lives in N.C.) and I filed for a federal employer ID for a business in N.C. The accountant who submitted the paperwork recommended an S Corp. I am not clear on what state returns I need to file since I have no income (yet) on this business but plenty of documented expenses specifically for “start-up” of this business. I am still in New York and would file a fed and NYS return but should I also file a N.C return showing expenses paid for a N.C. business but sent from NYS? I have already started but not finalized a fed and NYS return (with Taxact) using the standard deduction which would give me a tax return of $900. But I have over $40K of deductions and $3311 of withholding from my military pension that I would hope to get refunded. What do you recommend?

  5. John Zitzmann says:

    You say medical insurance premiums are not deductible. Please explain. The IRS web site says:
    “You can include in medical expenses insurance premiums you pay for policies that cover medical care. You cannot include in medical expenses insurance premiums that were paid and for which you are claiming a credit or deduction.”

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