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Itemized Deductions: A Beginner’s Guide


Have you ever wondered if you can itemize deductions on your tax return? Actually, have you ever wondered what, exactly, itemizing means? If so, you’ve come to the right place. I’m going to teach you the basics of itemizing: What itemizing is, whether or not you qualify to itemize and, if so, how to do it.

Note: Tax prep software can walk you through all potential deductions and even determine if it’s best to itemize or take the standard deduction. Find out why we recommend TurboTax and how you can use it to file your simple federal return for free.

What Does It Mean To “Itemize Deductions”?

When you’re filling out your federal tax return this year, you’ll be asked to either calculate your itemized deductions or to take the standard deduction—an amount predefined by the IRS and based upon your filing status (e.g., single or married filing jointly). If you don’t qualify to itemize deductions, you will choose the standard deduction.

To find your taxable income, you must subtract the standard or itemized deduction from your Adjusted Gross Income (AGI). To be blunt, these deductions are our friends because they lower the amount of taxes that we have to pay.

Itemized deductions are comprised of various types of certain expenses that you incur throughout the year (things that are—surprise, surprise—“tax-deductable”). If the total amount of these expenses is greater than the standard deduction amount, you should itemize instead of taking the standard deduction.

For example, the 2009 standard deduction for single taxpayers is $5,700. If the amount you spent on qualified itemized deductions (see below) is greater than $5,700, then you should itemize on your tax return.

Do you qualify to Itemize Deductions?

The most common expenses that qualify for itemized deductions include:

  • Home mortgage interest
  • Property, state, and local income taxes
  • Investment interest expense
  • Medical expenses
  • Charitable contributions
  • Miscellaneous deductions

HOME MORTGAGE INTEREST

If you took out a mortgage to purchase a home, the interest on that mortgage is deductible as an itemized deduction. Most people qualify for this deduction because it is allowed on up to the first $1,000,000 borrowed on a mortgage. This deduction is allowed for two residences per taxpayer. You can also deduct interest on a home equity loan as long as that loan is less than $100,000.

TAXES

If you own a home, you can deduct the real estate taxes that you pay on your home. However, you cannot deduct prepaid taxes; you can only deduct those taxes which are allocated to the year in which you are filing your taxes for. You can also deduct any state and local taxes (sometimes referred to as city tax) that you paid on your income during the year. This is a huge perk of itemizing (because most taxpayers pay state income tax but you can only deduct those taxes if you itemize deductions).

INVESTMENT INTEREST EXPENSE

When you start investing, you may incur expenses like broker or advisor fees or safe deposit box fees. You can deduct these as itemized deductions. Just be careful: You can only deduct up to the amount that you earn through your investments. So, if you had a bad year and didn’t earn anything, you cannot deduct these expenses. (However, you may be eligible for Capital Loss treatment.)

MEDICAL EXPENSES

Medical expenses are deductible as itemized deductions, but in a very limited way. You can only deduct the amount of medical expenses that exceed your AGI by 7.5 percent. For example, if your AGI was $50,000 and you spent $4,000 in medical expenses during the year, you could only deduct $250 ($50,000 * .075 = $3,750). Some qualifying medical expenses include: prescriptions, doctor’s fees/co-pays, insurance premiums, necessary surgery (not cosmetic), physical handicap costs, and transportation to a medical facility.

CHARITABLE CONTRIBUTIONS

If you were generous during the tax year and gave money or property to your favorite charity, you can deduct these gifts as an itemized deduction. Tithing to your church is included in this deduction. Contributions to political campaigns or needy families are NOT included in this deduction. (You must donate to a qualified organization to claim the deduction). The deduction is only limited to 50 percent of your AGI for cash donations and 30 percent of your AGI for property donations.

MISCELLANEOUS DEDUCTIONS

There are some miscellaneous deductions that you can claim, but you can only deduct these expenses by the amount that they exceed two percent of your AGI. These expenses include: unreimbursed business expenses, qualified educational expenses, expenses for uniforms, tax preparation fees, business use of your home, subscriptions to professional journals, and job-hunting expenses. These are just a few, so consult the IRS Website if you have a question about one of your expenses.

How Do You Claim The Itemized Deduction?

When you are filing out your 1040, you will see a question asking you to itemize or take the standard deduction towards the top of page two. You will need to use a separate form – Schedule A – to calculate your itemized deductions. This form can be found on the IRS website along with your 1040 form. The Schedule A form will walk you through the steps and calculations of each expense that I listed above. You will take the final amount on the Schedule A form and put it into your 1040 form where it asks for itemized deductions.

Things To Remember

Here are some helpful tips to summarize the itemized deductions process:

  • Choose one or the other: Itemized deductions or the standard deduction
  • If your itemized deductions are greater than $5,700 for 2009, you should itemize
  • If your itemized deductions are less than $5,700 for 2009, you should take the standard deduction
  • If you cannot itemize, you might be able to file a form 1040-EZ which is a shorter and simpler version of the traditional 1040 form. You may also be able to file your federal tax return using TubroTax absolutely free.
  • If you bought a house this year, there is a good chance that you will now be eligible to itemize

Remember that no matter which deduction you choose, these deductions are your friend—they help you by allowing you to pay fewer taxes. Once you get the hang of itemizing your deductions, start to keep detailed records of all your eligible expenses. This will help to make the tax process that much less painful.

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About Amber Gilstrap

Amber is a twenty-something CPA from Kansas City, Missouri who loves writing, working out, and---of course---finding fresh ideas for saving money. Follow her on twitter @ambergilstrap.

Comments

  1. Hello, I received a 1099-MISC form from my employer for tax year 2009. When I presented this form together with my expenses for work to an accountant she said I cannot itemized my deductions. I have to use the standard deduction. How much money should I be making in order for me to be able to apply itemized deductions?

  2. Patel Singh says:

    I know this person, who is residing overseas for a number of years and have not filed any Annual Tax Returns(he is staying with his family there..Income-less, rather than homeless; And have no job. Will he be penalized for not filing at all (as long he does not owe any income-tax to IRS)?