Itemized Deductions

What are Itemized Deductions? 

Itemized deductions are specific expenses that taxpayers can subtract from their adjusted gross income (AGI) to reduce their taxable income. It allows taxpayers to deduct specific expenses such as mortgage interest, medical costs, and charitable contributions for greater tax savings.  

Itemized deductions are essential for taxpayers who have significant deductible expenses that exceed the standard deduction (Individuals have the option to either claim the standard deduction or itemize deductions). By itemizing, taxpayers can lower their taxable income and reduce the amount of tax owed. This method is particularly beneficial for homeowners, high medical expense payers, and those who make substantial charitable contributions. Additionally, itemizing can help individuals manage their finances better by providing tax relief for eligible expenditures. 

Common Examples of Itemized Deductions 

The IRS allows a variety of expenses to be itemized, including but not limited to: 

• Medical and Dental Expenses: Only the portion of expenses exceeding 7.5% of AGI is deductible. These may include doctor visits, prescription medications, medical equipment, and certain surgeries. 

• State and Local Taxes (SALT): Taxpayers can deduct up to $10,000 in state and local income, property, and sales taxes combined. 

• Mortgage Interest: Interest paid on home loans up to $750,000 (or $1 million for loans before December 16, 2017) can be deducted. 

• Charitable Contributions: Donations to qualifying non-profit organizations are deductible, with limits ranging from 30% to 60% of AGI based on the type of charity. 

• Investment Interest: Interest paid on money borrowed for investments can be deducted up to the amount of investment income. 

• Gambling Losses: Deductible only up to the amount of reported gambling winnings. 

• Casualty and Theft Losses: Limited to federally declared disaster areas and exceeding 10% of AGI. 

How to Calculate Itemized Deductions 

Calculating itemized deductions requires summing up all eligible expenses and ensuring they exceed the standard deduction amount. Here’s how to determine whether itemizing is beneficial: 

• List all eligible expenses: Gather documentation for deductible expenses such as medical bills, property tax payments, and mortgage interest statements. 

• Apply deduction limits: Some deductions, like medical expenses, must exceed a percentage of AGI before they can be claimed. 

• Use IRS Schedule A: Report all eligible deductions on Schedule A of Form 1040. 

• Compare with the standard deduction: If the total itemized deductions exceed the standard deduction, itemizing is the better option. 

For example, if a taxpayer with an AGI of $80,000 incurs $15,000 in deductible expenses, itemizing would reduce taxable income to $65,000. If the standard deduction for their filing status is lower, they would benefit from itemizing