Items You Can Deduct on Schedule A

Tax deductions are items that help you reduce your taxable income before your tax liability is calculated. There are two types of deductions namely:

On this post we will be discussing primarily the itemized deduction or items you can deduct on the 1040 Schedule A. These types of deductions are called below the line deductions because they are applied after the adjusted gross income (AGI or the “Line”) has been calculated. In general, you would need to itemize your return if they are greater than the standard deduction or if you are not allowed to claim the itemized deduction. Below are the reasons on why you may need to itemize:

  • You have a large amount of  health care expenses not covered by your insurance company
  • You pay interest on your home or investment property
  • You have large amount of taxes paid
  • You made large donations to qualified charities
  • You have a lot of unreimbursed employee business expenses
  • You have large casualty or theft losses not covered or reimbursed by your insurance company.

Why taxpayers cannot itemize even if their itemized deductions exceed the standard deduction?

This is a very good question. Taxpayers need to itemize if they fall into the following:

  • A married person whose filing status is married filing separately and whose spouse is itemizing deductions.
  • An individual who is a nonresident alien or dual-status alien during any part of the current tax year. Dual status occurs when you are considered both a nonresident and resident alien during the same year.
  • An individual who changes his or her annual accounting cycle and is filing a return for a period of less than 12 months.

Limitations on the Itemized Deductions

Not all expenses can be fully deducted. Some of them are subject to the floor amount, which are calculated by taking a specific percentage of the AGI. The “floor” means that you can only take deductions that exceed that amount.

  • Healthcare or medical expenses are subject to a 7.5% of the AGI floor
  • Miscellaneous subject to a 2% of the AGI floor
  • Casualty or Theft losses are subject to the 10% of the AGI floor

Example of calculating the floor:

If your AGI is $100,000 and your qualified health expenses are $8,000, your “floor” amount is $7,500 (7.5% of $100,000). This means that the first $7,500 of your qualified health expenses will be excluded from your itemized deduction. Thus, you will only be able to deduct $500 of those expenses.

Most Common Itemized Deductions

  • Healthcare Expenses – Medical and dental expenses which may include qualified expenses not covered by the insurance companies such as insurance co-pay or deductible, prescription pharmacy, long-term care.
  • Interest Paid – Includes mortgage interest paid for purchase debt of up to $1,000,000 of home values, qualified mortgage insurance premium, points paid, interest paid on home equity loans of up to $100,000 loan value, and investment interest.
  • Taxes paid – real estate property tax, personal property tax, state income tax, local government (county or city) income tax
  • Charitable contributions – Cash contributions and non-monetary such as clothing, car, household items or mileage for volunteer work to qualified charitable organizations.
  • Gambling losses – Gambling losses are only deductible if you have winnings. In addition, you can only deduct up to the amount of the winnings.
  • Casualty or Theft Losses – any losses not covered or not reimbursed by your insurance company.
  • Miscellaneous Expensesunreimbursed employee business expenses, tax preparation fees, legal fees, qualified educational expenses, union dues, professional license, subscription to professional magazines, etc.

Photo credit: blmurch

Comments

  1. Aloysa says:

    Very informative… Honestly, I wish they would come up with more deductions and credits. Every year it seems to be not enough!

  2. Do you know what the income limits are if any for mortgage interest deductions? i.e. once you make over $250,000 a year, you can’t deduct X amount of your mortgage. I know there’s one for rental properties.

    thx

    • Ken says:

      TAX ALERT

      For 2010 Tax Season, the itemized deduction “overall” limitation (or phaseout), is repealed altogether. Higher income taxpayers will not have to reduce their total itemized deductions based on their AGI.
      See 2010 tax update page: http://spruceupyourfinances.com/important-tax-update-for-2010-you-dont-want-to-miss/

      For 2011 and beyond tax season:

      The phaseout on itemized deduction will return and it will be 3% of the amount of your adjusted gross income (AGI) in excess of the applicable threshold (the threshold for tax year 2009 is $166,800 ($83,400 for married filing separately) increased for inflation. No more than 80% of these otherwise allowable deductions will be phased out.

      The itemized deductions Subject to Phase-out limitations
      – Home Mortgage Interest
      – Taxes paid
      – Charitable contributions,
      – Miscellaneous expenses.

      The phase-out limitations will be applied after you have used all other limitations such as the 2% limit for miscellaneous expenses or the AGI limitation for the charitable contributions, and the home mortgage limitations of $1,000,000 ($500,000 for married filing separate) acquisition debt or $100,000 ($50,000 for married filing separate) limits on home equity loans.)

      Itemized Deductions Not Subject to the Phase-out Limitations:
      -Medical expenses
      -gambling losses
      -investment interest expense
      -casualty and theft losses.