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.
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 and $12,000 for others.
The Tax Effects of a Higher Standard Deduction and No Personal Exemptions
Under the new Republican tax plan, 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, 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.
Itemizers will receive less of a deduction. Prior to 2018, people who itemized instead of claiming the standard deduction could claim both itemized deductions plus 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 plus 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 significant difference.
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:
- Medical and dental expenses minus any insurance reimbursement, subject to a 10% AGI floor. The 7.5% AGI floor that was applicable before 2013 will continue to apply until 2016, if the taxpayer or spouse is at least 65.
- 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, home equity loans, 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, is also deductible.
- Casualty and theft losses, subject to a floor of 10% of AGI plus $100.
- Unreimbursed employee expenses, subject to a 2% AGI floor. However, the floor does not apply to handicapped employees, performing artists, or to job-related moving expenses.
- Tax preparation fees.
- 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.
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 that applies in 2018 and afterwards, will limit the total amount that can be deducted as any combination of state and local income taxes or sales taxes, or property taxes to $10,000. Additionally, this GOP bill will prevent filers from deducting any prepayments of these 2018 taxes in 2017.
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 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:
|Filing status||Phaseout Threshold Amount (Pease Limit)|
|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|
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:
- $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
|80% of Itemized |
|Income at 80% Phaseout|
|Single Filers||Joint Filers|