Itemized Deductions: An In-Depth Look
Itemized deductions are specific expenses that taxpayers can list individually and deduct from their adjusted gross income to reduce their taxable income. This is an alternative to claiming the standard deduction. Only eligible deductions listed under IRS rules can be claimed as itemized deductions.
Key Aspects of Itemized Deductions
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Mortgage Interest: Interest paid on a mortgage for a primary or secondary home. This deduction is often a significant benefit for homeowners.
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Property Taxes: State and local property taxes paid on real estate can be deducted.
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Medical Expenses: Costs exceeding 7.5% of adjusted gross income can be itemized.
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Charitable Contributions: Donations to qualifying charitable organizations can be deducted.
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Casualty and Theft Losses: Losses from casualty, disaster, or theft exceeding a specific threshold can be itemized.
Examples
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The Sawyers: The Sawyers pay $12,000 in interest on their home mortgage and $8,000 in property taxes. Additionally, they contribute $2,000 to charity and pay $3,000 in state income taxes. By itemizing these deductions, they can reduce their federal taxable income by $25,000.
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The Johnsons: The Johnsons experience significant medical expenses due to health issues. For the year, their medical expenses reach $15,000, which exceeds 7.5% of their adjusted gross income. They itemize these expenses, alongside their mortgage interest and property taxes, to lower their taxable income.
Frequently Asked Questions
Q: What are itemized deductions? A: Itemized deductions are specific expenses taxpayers can list on their tax return to reduce their taxable income, as opposed to taking the standard deduction.
Q: Can all taxpayers itemize deductions? A: No, taxpayers must choose between the standard deduction and itemizing. They can only itemize if their deductions are greater than the standard deduction.
Q: Is there a limit to how much can be deducted through itemized deductions? A: Some itemized deductions come with limits or thresholds set by the IRS, such as the cap on state and local taxes (SALT) deductions.
Q: What types of mortgage interest are deductible? A: Interest paid on loans for acquiring, constructing, or improving a primary or secondary home, within certain limits, is deductible.
Q: Are there any changes to itemized deductions in recent tax laws? A: Yes, tax laws such as the Tax Cuts and Jobs Act of 2017 have introduced changes, including limits on SALT deductions and changes in medical expense thresholds.
Related Terms
- Standard Deduction: A preset amount that taxpayers can deduct without itemizing, varying based on filing status.
- Adjusted Gross Income (AGI): Gross income minus adjustments, serving as the basis for calculating taxable income.
- SALT Deduction: Deduction for state and local taxes paid, capped at $10,000 under current tax law.
- Tax Credits: Reductions in the actual tax owed, unlike deductions, which only reduce taxable income.
- Deductible Expenses: Specific costs that are allowed to be subtracted from gross income to reduce taxable income.
Online Resources
- IRS Publication 17 - Your Federal Income Tax
- Nolo’s Guide to Tax Deductions
- TurboTax: What Are Itemized Deductions?
References
- Internal Revenue Service (IRS). “Publication 17: Your Federal Income Tax.” Washington, D.C.
- Tax Cuts and Jobs Act of 2017 (26 U.S.C. § 1 et seq.).
Suggested Books for Further Studies
- J.K. Lasser’s Your Income Tax 2023
- Nolo’s Deduct It!: Lower Your Small Business Taxes
- The Ernst & Young Tax Guide 2023
