Itemized Deductions

Certain personal expenses, such as mortgage interest on a primary residence, can be deducted against personal ordinary income to lower the amount of income tax, but not payroll tax, owed. These personal expense deductions are often referred to as itemized deductions because the taxpayer must list each individual deduction and the amount.

Alternatively, the taxpayer can choose the standard deduction, which is based on filing status. However, a married couple where neither spouse qualifies as a head of household must both either itemize their deductions or claim the standard deduction, unless the couple is divorced or legally separated, in which case each spouse can choose independently. For a couple filing separately, they can each claim the itemized expenses that they paid, including expenses for property owned jointly, such as the primary residence. For instance, if both spouses paid mortgage interest and real estate taxes, then each can claim the portion that they paid.

The decision to itemize deductions or to use the standard deduction can be changed by amending the taxpayer's return by filing Form 1040X, Amended U.S. Individual Income Tax Return within the 3-year period of the due date for the original return. Taxpayers who were married and filed separately must make the same change — both either itemizing or claiming the standard deduction.

Itemized Deductions

Most itemized deductions are subject to a floor, which is a percentage of the adjusted gross income (AGI), that must be subtracted from the itemized amount to determine the deduction. For instance, most medical expenses can be itemized, but they are subject to a 10% or 7.5% floor, depending on the taxpayer. So if John Doe has an AGI of $100,000 and a 10% AGI floor, then the first $10,000 of his medical expenses is not deductible. Some itemized deductibles have a ceiling, also expressed as a percentage of AGI, which sets the maximum that can be deducted. For instance, there is a ceiling of 50% of the AGI for most charitable contributions, which means that John can deduct a maximum of $50,000 for charitable contributions.

Itemized deductions are claimed on Schedule A of Form 1040, and include the following:

Itemized Deductions for Expenses Incurred Doing Volunteer Work

Expenses incurred doing volunteer work are itemized deductions. Deductions include the following:

Because only expenses that are paid are deductible, nondeductible items include the value of services provided by the volunteer. So an attorney, for instance, cannot deduct her hourly rate while working for a charity. Also, expenses incurred only indirectly because of the charity work cannot be deducted, such as for babysitting children while the parents do charity work. The rental value of a home that is offered by the homeowner to a charity as a means of fundraising, such as selling raffle tickets for a specific amount of time in a vacation home, cannot be deducted by the homeowner.

As with all deductions, records and proof of deduction must be kept, but if expenses exceed $250, then the taxpayer must also receive a written acknowledgement from the organization receiving the benefit.

New Tax Changes for 2013: Pease Limit

There is a new phase-out rule — often referred to as the Pease limit, after the Congressman instrumental in enacting it — restricting the use of itemized deductions for upper-income taxpayers:

Pease Limit: Income Thresholds for the Phaseout of Itemized Deductions
Filing status Phaseout Threshold Amount (Pease Limit)
  2016 2015 2014 2013
Single$259,400$258,250$254,200$250,000
Head of Household$285,350$284,050$279,650$275,000
Married Filing Jointly$311,300$309,900$305,050$300,000
Married Filing Separately$155,650$154,950$152,525$150,000
  • Adjusted annually for inflation.
  • These income thresholds are same for the phaseout of personal and dependent exemptions.
  • Itemized deductions are reduced by 3% of the AGI that exceeds the threshold amounts until they equal an 80% reduction, so even the richest taxpayers will still be able to reduce their taxable income by 20% of their itemized deductions.
  • The higher the amount of itemized deductions, the higher the income at which 80% phaseout occurs.
  • The itemized deduction phase-out rule does not apply to itemized deductions for:

To calculate the amount of allowable itemized deductions:

Deductible Amount = Total Itemized Deductions – (Income – Pease Limit) × 3%

Example: Itemized Deduction Phaseout Rules

A married couple filing jointly earns $450,000 and has $30,000 of itemized deductions. Therefore, the amount of their itemized deductions that is actually deductible is:

Sample of 80% Phaseout Incomes
Itemized
Deductions
80% of Itemized
Deductions
Income at 80% Phaseout
Single Filers Joint Filers
$30,000$24,000$1,050,000$1,100,000
$60,000$48,000$1,850,000$1,900,000
$90,000$72,000$2,650,000$2,700,000
$120,000$96,000$3,450,000$3,500,000
$150,000$120,000$4,250,000$4,300,000
$180,000$144,000$5,050,000$5,100,000
$210,000$168,000$5,850,000$5,900,000
$240,000$192,000$6,650,000$6,700,000
$270,000$216,000$7,450,000$7,500,000
$300,000$240,000$8,250,000$8,300,000