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 called 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.

Under the new tax package passed by the Republicans at the end of 2017, known as the Tax Cuts and Jobs Act, a new provision nearly doubles the standard deduction to $24,000 for married couples filing jointly, $18,000 for head of household, and $12,000 for single and married filing separately.

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% floor. 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 60% (increased from 50% by the new tax law) of the AGI for most charitable contributions, so John can deduct a maximum of $60,000 for charitable contributions.

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

• 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 1^st or 2^nd home mortgages, refinanced mortgages, and points are deductible, if certain tests are satisfied. The premiums for a qualified mortgage insurance program obtained 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.

Itemized Deductions for Expenses Incurred Doing Volunteer Work

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

• 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 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 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.

Historical Note: Pease Limit

Under the new tax package passed by the Republicans at the end of 2017 to benefit the wealthy, known as the Tax Cuts and Jobs Act, the Pease Limit was eliminated, so there are no restrictions on itemizing deductions for the wealthy.

To calculate the amount of allowable itemized deductions:

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