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Under United States tax law, itemized deductions are eligible expenses that individual taxpayers can claim on federal income tax returns and which decrease their taxable income, and is claimable in place of a standard deduction, if available.
Most taxpayers are allowed a choice between the itemized deductions and the standard deduction. After computing their adjusted gross income (AGI), taxpayers can itemize deductions (from a list of allowable items) and subtract those itemized deductions (and any applicable personal exemption deductions) from their AGI amount to arrive at the taxable income. Alternatively, they can elect to subtract the standard deduction for their filing status (and any applicable personal exemption deduction) to arrive at the taxable income. In other words, the taxpayer may generally deduct the total itemized deduction amount, or the applicable standard deduction amount, whichever is greater.
The choice between the standard deduction and itemizing involves a number of considerations:
- Only a taxpayer eligible for the standard deduction can choose it.
- U.S. citizens and aliens who are resident for tax purposes are eligible to claim the standard deduction. Nonresident aliens are not eligible.
- If the taxpayer is filing as "married, filing separately", and his or her spouse itemizes, then the taxpayer cannot claim the standard deduction. In other words, a taxpayer whose spouse itemizes deductions must either itemize as well, or claim "0" (zero) as the amount of the standard deduction.
- The taxpayer must have maintained the records required to substantiate the itemized deductions.
- If the amounts of the itemized deductions and the standard deduction do not differ much, the taxpayer may take the standard deduction to reduce the possibility of adjustment by the Internal Revenue Service (IRS). The amount of standard deduction cannot be changed following an audit unless the taxpayer's filing status changes.
- If the taxpayer is otherwise eligible to file a shorter tax form such as 1040EZ or 1040A, he or she would prefer not to prepare (or pay to prepare) the more complicated Form 1040 and the associated Schedule A for itemized deductions.
- The standard deduction is not allowed for calculating the alternative minimum tax (AMT). If the taxpayer claims the standard deduction for regular income tax, he or she cannot itemize deductions for the AMT. Thus, for a taxpayer who pays the AMT (i.e., their AMT is higher than regular tax), it may be better to itemize deductions, even if it produces a result which is less than the standard deduction.
Deductions are reported in the tax year in which the eligible expenses were paid. For example, an annual membership fee for a professional association paid in December 2009 for year 2010 is deductible in year 2009.
Examples of allowable itemized deductions
There are a number of allowable deductions:
- Medical expenses, to the extent that the expenses exceed 10% of the taxpayer's AGI (changed from 7.5% as of January 1, 2013 except for individuals 65 and over, who used the 7.5% floor until January 1, 2017). (E.g., a taxpayer with an AGI of $20,000 and medical expenses of $5,000 would be eligible to deduct $3000 of their medical expenses ( 20,000 X .10 = 2000; 5000 - 2000 = 3000 ).) The 10% floor means that most taxpayers are unable to take advantage of the medical expense deduction. Allowable medical expenses include:
- Capital expenditures that are advised by a physician, where the facility is used primarily by the patient alone and the expense is reasonable (e.g., a swimming pool for someone with degenerative spinal disorder, an elevator for someone with heart disease)
- Payments to doctors, dentists, surgeons, chiropractors, psychologists, counselors, physical therapists, osteopaths, podiatrists, home health care nurses, cost of care for chronic cognitive impairment
- Premiums for medical insurance (but not if paid by another, or with pre-tax money)
- Premiums for qualifying long-term-care insurance, depending on the taxpayer's age
- Payments for prescription drugs and insulin
- Payments for devices needed to treat or compensate for a medical condition (crutches, wheelchairs, prescription eyeglasses, hearing aids)
- Mileage for travel to and from doctors and medical treatment
- Necessary travel expenses
- Non-deductible medical expenses include:
- Over-the-counter medications
- Health club memberships (to improve general health & fitness)
- Cosmetic surgery (except to restore normal appearance after an injury or to treat a genetic deformity)
- State and local taxes paid, but the entire sum of this category is capped at $10,000 starting in 2018. These include:
- Either the entire year's Income taxes or the entire year's state and local general sales taxes, but not both.
- Property taxes, including vehicle registration fee, if assessed by reference to the value of the property. This amount is in addition to the previous choice of either income or sales tax.
- but not including:
- Mortgage interest expense on debt incurred in connection with up to two homes, subject to limits (up to $1,000,000 in purchase debt, or $100,000 in home equity loans)
- also, points paid to discount the interest rate on up to two homes; points paid upon acquisition are immediately deductible, but points paid on a refinance must be amortized (deducted in equal parts over the lifetime of the loan)
- also private mortgage insurance premiums through 2010
- Investment interest expenses (interest paid to borrow money used for investing), up to the amount of income reported from investments (the balance is deferred until more investment income is declared)
- Charitable contributions to allowable recipients; this deduction is limited to either 30% or 50% of AGI, depending on the characterization of the recipient. Donations can be made as money, or in the form of goods. The value of donated services cannot be deducted as a contribution. Reasonable expenses necessary to provide donated services can, however, be deducted (such as mileage, special uniforms, or meals). Non-cash donations valued at more than $500 require special substantiation on a separate form. Non-cash donations are deductible at the lesser of the donor's cost or the current fair market value, unless the non-cash donation has been held for greater than a year (Long term), in which case it can be deducted at fair market value.
- Eligible recipients for charitable contributions include:
- Churches, synagogues, mosques, other houses of worship
- Federal, state, or local government entities
- Fraternal or veterans' organizations
- Non-eligible recipients include:
- Political campaigns or political action committees (PACs)
- Eligible recipients for charitable contributions include:
- Casualty and theft losses, to the extent that they exceed 10% of the taxpayer's AGI (in aggregate), and $100 (per event, $500 starting tax year 2009)
- Gambling losses, but only to the extent of gambling income (For example, a person who wins $1,000 in various gambling activities during the tax year and loses $800 in other gambling activities can deduct the $800 in losses, resulting in net gambling income of $200. By contrast, a person who wins $3,000 in various gambling activities during the year and loses $3,500 in other gambling activities in that year can deduct only $3,000 of the losses against the $3,000 in income, resulting in a break-even gambling activity for tax purposes for that year—with no deduction for the remaining $500 excess loss.) Worth noting to this rule is that unused non-professional gambling losses may not be carried forward to subsequent tax years. In contrast, however, this rule does not apply to professional gamblers, who are allowed to deduct losses from other income.
Miscellaneous itemized deductions
Regardless of miscellaneous itemized deductions allowed in 26 U.S.C. § 67, for the taxable years 2018 through 2025, no miscellaneous itemized deductions are allowed for any taxable year beginning after December 31, 2017, and before January 1, 2026 (See U.S.C. § 67(g)).
It is important to distinguish miscellaneous itemized deductions from other "normal" itemized deductions. The reason for this is because miscellaneous itemized deductions are subject to a 2% floor, a.k.a. the "2% Haircut." A taxpayer can only deduct the amount of miscellaneous itemized deductions that exceed 2% of their adjusted gross income. For example, if a taxpayer has adjusted gross income of $50,000 with $4,000 in miscellaneous itemized deductions, the taxpayer can only deduct $3,000, since the first $1,000 is below the 2% floor.
There are 12 deductions listed in 26 U.S.C. § 67(b). These are not miscellaneous itemized deductions, and thus not subject to the 2% floor (although they may have their own rules). Any deduction not found in section 67(b) is a miscellaneous itemized deduction. Examples include the following.
- Job-related clothing or equipment, such as steel-toed boots, hardhats, uniforms (if they are not suited for social wear: suits and tuxedoes are not deductible, even if the taxpayer does not like to wear them, but nurses' and police uniforms are), tools and equipment required for work
- Union dues
- Unreimbursed work-related expenses, such as travel or education (so long as the education does not qualify the taxpayer for a new line of work; law school, for example, is not deductible) (repealed, effective January 1, 2018
- Fees paid to tax preparers, or to purchase books or software used to determine and calculate taxes owed
- Subscriptions to newspapers or other periodicals directly relating to one's job
If the taxpayer's adjusted gross income is above a threshold (or "applicable amount"), then the total allowable itemized deductions is reduced by the lesser of
- 3% of the excess of adjusted gross income over the "applicable amount" (see below); or
- 80% of the total itemized deductions otherwise allowable
The "applicable amount" varies according to filing status (see below).
As an example, if an individual filing as "head of household" has one's adjusted gross income is $500,000 and one has $20,000 in itemized deductions, first figure out 3% of the excess above the "applicable amount" (see below):
Then figure out 80% of the total deductions
Reduce the itemized deduction by the lesser of the above amounts. In this instance, the lesser value is $6,750. As such, the taxpayer's total itemized deductions shall be reduced by $6,750, leaving $13,250 of itemized deductions.
In addition, this limitation on itemized deductions is applied after any other limitation. This means that you first need to figure out the total allowable miscellaneous itemized deductions, etc., before determining any limits on the total amount of deductions.
Applicable Amount. For 2013, the "applicable amount" under § 68(b) of the Tax Code were as follows:
- $300,000 in the case of married couples filing a joint return or surviving spouse;
- $150,000 in the case of a married couple filing separately;
- $275,000 in the case of head of household;
- $250,000 in the case of an unmarried individual who is not a surviving spouse or head of household.
Additionally, after 2013 the applicable threshold amounts are adjusted for inflation.
This limitation of itemized deductions has been phased out. For taxable years 2006 and 2007, the amount was reduced to 2/3 of the limitation, and for taxable years 2008 and 2009, the amount was reduced to 1/3 of the limitation. This phase out was completed on January 1, 2010. But in 2010, Congress extended repeal of the itemized deduction limitation through 2012 and in 2011 the repeal was again up for a vote in Congress. Many lawmakers wanted to extend repeal of the itemized deduction limitation for 1-2 more years (or make repeal permanent) but the American Taxpayer Relief Act instead reinstated the itemized deduction limitation for 2013 and subsequent years.
- 26 U.S.C. § 67
- 26 U.S.C.
- 26 U.S.C. § 67(b)
- Schwartz, Bruce H. (January 3, 2018). "2018 Tax Reform Series: Tax Law Changes to Employee Fringe Benefits". Benefits Law Advisor. Jackson Lewis P.C.
- Chirelstein, Marvin A., Federal Income Taxation 198 (Foundation Press, 10th Ed., 2005)
- 26 U.S.C. § 68
- 26 U.S.C. § 68(d)
- Presti&Naegele How do I calculate the reinstated Pease itemized deductions limitation under ATRA?
- 26 U.S.C. § 68(f)