Itemized Deductions
Certain personal expenses, such as mortgage interest on a primary residence, can be deducted against personal ordinary income to lower the income tax, but not payroll tax, owed. These personal expense deductions are called itemized deductions because the taxpayer must list each deduction and its 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.
The Tax Effects of a Higher Standard Deduction and No Personal Exemptions
Under the tax package passed by the Republicans at the end of 2017, the Tax Cuts and Jobs Act (TCJA), a new provision nearly doubles the standard deduction.
Under the TCJA, people who do not itemize deductions will receive a higher deduction because of the higher standard deduction, which more than compensates for the elimination of the personal exemption for single taxpayers, which, for 2018, would have been $4100. For instance, for a single taxpayer, the standard deduction would have been $6500, so, combined with the $4100 for the personal exemption, would have yielded a $10,600 deduction. Under the new tax plan, with a higher standard deduction of $12,000, this single taxpayer would be entitled to an additional $1400 deduction. However, most people with dependents will receive less of a deduction because of the elimination of the dependent exemptions.
Itemizers will receive less of a deduction. Prior to 2018, people who itemized instead of claiming the standard deduction could claim both itemized deductions + the personal exemption. By eliminating the personal exemption, itemizes will lose more than $4000 of deductions. For instance, if a single taxpayer claimed $12,000 of itemized deductions, then the taxpayer could both deduct the $12,000 + a personal exemption, which in 2018 would have been $4100. Under the new Republican tax plan, the taxpayer can only claim the $12,000 standard deduction. This won't make much difference for the wealthy, most of whom have tens of thousands of dollars of itemized deductions, but for the millions of taxpayers who claim the mortgage interest deduction, medical or dental deductions, state and local, or property taxes, charitable deductions, interest paid on money borrowed for investments, such as margin interest, or other itemized deductions, it will make a big difference.
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 7.5% floor. So if John Doe has an AGI of $100,000, then the first $7,500 of his medical expenses are not deductible. Some itemized deductibles have a ceiling, also expressed as a percentage of AGI, which sets the maximum deduction. For instance, a 60% AGI ceiling applies for cash charitable contributions, so John can deduct a maximum of $60,000 in cash for charitable contributions.
Itemized deductions are claimed on Schedule A of Form 1040, and include:
- Medical and dental expenses minus any insurance reimbursement, subject to a 7.5% AGI floor.
- Taxes
- State and local income taxes or general sales taxes, but not both.
- State, local, or foreign real estate taxes based on the assessed value of property that was not used for business.
- State and local personal property taxes based on assessed value and paid annually.
- Example: a state assesses a car registration fee based on the value and weight of the car. Only the part of the fee based on the value of the car can be itemized.
- Taxes paid to a foreign country or United States possession.
- Interest paid on borrowed money for investments that earn taxable non-passive income is deductible to the extent of net investment income. More information can be found in Deductibility of Investment Expenses.
- Interest on 1st or 2nd home mortgages, refinanced mortgages, and points are deductible, if certain tests are satisfied. The premiums for a qualified mortgage insurance program from a federal agency, such as the Federal Housing Administration, are also deductible.
- Expenses related to producing or collecting taxable income, including the management of income producing property.
- Other miscellaneous deductions, such as gambling losses, but only to the extent of gambling winnings.
The Tax Cuts and Jobs Act has additional provisions that apply from 2018 to 2025, that limits the amount that can be deducted as any combination of state and local income taxes or sales taxes, or property taxes to $10,000. Additionally:
- miscellaneous itemized deductions subject to the 2% AGI floor will no longer be deductible, including:
- unreimbursed employee business expenses
- tax preparation expenses
- investment expenses
- hobby expenses, and
- safe-deposit box rentals
- interest on home equity loans are no longer deductible
- a deduction for home mortgage interest is reduced to $750,000 of home acquisition debt
- the 50% limit of adjusted gross income on charitable contributions of cash have increased to 60%
These provisions expire after 2025 and will revert to previous law unless Congress acts before then to change it.
Itemized Deductions for Expenses Incurred Doing Volunteer Work
Expenses incurred doing volunteer work are itemized deductions. Deductions include:
- unreimbursed costs
- travel costs away from home, such as for meals, lodging, and other travel costs, can be deducted if done for a charity as an official delegate; however, travel costs cannot be deducted by someone who is simply traveling to the charity to do some volunteer work
- uniforms that the charity requires
- transportation costs to and from a charity site
- foster care expenses, such as for food, clothing, and other expenses incurred as a foster parent, but only if the parent is not intending to adopt the child
Because only paid expenses are deductible, nondeductible items include the value of services provided by volunteers. 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 offered by a homeowner to a charity for fundraising, such as selling raffle tickets for a specific 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 a written acknowledgement from the organization receiving the benefit is needed.
Historical Note: Pease Limit
The Tax Cuts and Jobs Act eliminated the Pease Limit until 2025, so there are no restrictions on itemizing deductions for the wealthy until then. The Pease Limit will return in 2026 unless Congress changes it.
There was a phase-out rule — often called the Pease limit, after the Congressman instrumental in enacting it — restricting itemized deductions for upper-income taxpayers:Filing status | Phaseout Threshold Amount (Pease Limit) | |||||
---|---|---|---|---|---|---|
2018 | 2017 | 2016 | 2015 | 2014 | 2013 | |
Single | $266,700 | $261,500 | $259,400 | $258,250 | $254,200 | $250,000 |
Head of Household | $293,350 | $287,650 | $285,350 | $284,050 | $279,650 | $275,000 |
Married Filing Jointly | $320,000 | $313,800 | $311,300 | $309,900 | $305,050 | $300,000 |
Married Filing Separately | $160,000 | $156,900 | $155,650 | $154,950 | $152,525 | $150,000 |
- Adjusted annually for inflation.
- These income thresholds are the same for the phaseout of personal and dependent exemptions.
- Itemized deductions are reduced by 3% of the AGI exceeding the threshold amounts until they equal an 80% reduction, so even the richest taxpayers can still reduce their taxable income by 20% of their itemized deductions.
- The itemized deduction phase-out rule does not apply to itemized deductions for:
To calculate 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, their itemized deductions that is actually deductible is:
- $450,000 − $300,000 = $150,000
- $150,000 × 3% = $150,000 × .03 = $4,500
- Deductible Amount of Itemized Deductions = $30,000 − $4,500 = $25,500
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 |