What Are Itemized Tax Deductions?

Itemized tax deductions are eligible expenses the government allows you to deduct from your adjusted gross income to arrive at your taxable income.

Mar 29, 2014 at 10:30AM
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It seems like every year I get asked, "What are itemized tax deductions and can I use them?" Itemized tax deductions are expenses the government allows you to subtract from your income to determine your taxable income.

The alternative to itemizing tax deductions is using the government's standard tax deduction, which, for tax year 2013 is $6,100 for single taxpayers. That's more than many people can claim by itemizing; however, not everyone can claim the standard deduction. This is one of the areas where it pays to educate yourself so you don't end up paying the government more than you owe them. Read on to find out more.

What are itemized tax deductions?
Itemized tax deductions are eligible expenses the government allows you to deduct from your adjusted gross income (AGI) to arrive at your taxable income.

Itemized tax deductions include but are not limited to:

  • State and local taxes paid
  • Mortgage interest expenses
  • Charitable contributions
  • Medical and dental expenses above 7.5%-10% of your AGI, depending on your age
  • Unreimbursed job-related expenses and miscellaneous deductions totaling more than 2% of your AGI

If the alternative minimum tax applies to you, some of the itemized deductions that you claim may be reduced, particularly state and local income taxes, as well as medical expenses. You can read more from the IRS here.

Who must itemize deductions?
Most people can choose whether or not to itemize, but some people must itemize. This would apply to someone who is married and files as married filing separately, whose spouse itemizes deductions. The other main group who must itemize is people who are nonresident non-U.S. citizens, which the government calls alien, or a dual-status alien during the year. Dual-status alien means that your status changed between resident alien and non-resident alien during the year.

Limits on itemized deductions
For high income taxpayers, the IRS starts limiting the deductions that taxpayers can make after a certain level of income.

Taxpayer Status

Threshold

Single

$250,000

Married filing jointly or qualifying widow(er)

$300,000

Married filing separately

$150,000

Head of household

$275,000

Source: IRS.

If your income is above the threshold, then your total allowed itemized deduction is reduced by the lesser of either:

  • 3% of your income above the threshold
  • 80% of the total itemized deductions allowed

If you're a single taxpayer with an income of $300,000, and you have $10,000 in total itemized deductions:

  • 3% of your income above the threshold is 3% times $50,000 = $1,500
  • 80% of the total itemized deductions allowed is 80% times $10,000 = $8,000.

The lesser of the two is $1,500, so your total itemized deductions are reduced by that amount to $8,500.

Standard tax deduction
If you're not claiming itemized deductions, the government allows you to claim a fairly large standard deduction that varies based on your taxpayer status.

Taxpayer Status

Standard Deduction

Single

$6,100

Married filing jointly or qualifying widow(er)

$12,200

Married filing separately

$6,100

Head of household

$8,950

Source: IRS

If you are single, and were born either before Jan. 2, 1949, or are blind, you get to add $1,500 to your standard deduction for each of those factors. For married or head of household, for each qualification you add $1,200 to your standard deduction. The calculation gets complicated for widow(er)s with dependent children. You can read more from the IRS here.

Take advantage of this little-known government tax rule
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report, "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Find Dan Dzombak on Twitter, @DanDzombak, or on his Facebook page, DanDzombak.Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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