Making Itemized Deductions on 1040 Schedule A
Is It to Your Advantage to Itemize?
Itemizing isn't for the faint of heart. It involves a whole group of tax deductions you can list on Schedule A of Form 1040, and it requires some work to pull them together. You can claim either the standard deduction for your filing status, or you can itemize your qualifying individual deductions ... line by line by line. In either case, the standard deduction or the total of your itemized deductions will reduce the amount of income on which you have to pay federal income tax.
What Does Itemizing Deductions Mean?
Itemizing is just what it sounds like—reporting your actual expenses for various types of allowable deductions, totaling them up one by one. You must keep accurate track of what you spend during the year, and you should keep supporting receipts and documentation to show that these expenses are legitimate in case the Internal Revenue Service ever asks for proof.
Documentation can include bank statements, check stubs, property tax statements, insurance bills, medical bills, and acknowledgement letters for charities to which you might have donated.
The Difference Between Itemized Deductions and the Standard Deduction
Itemizing your deductions versus claiming the standard deduction is an either/or choice. You can't do both, although you can change your decision from year to year. The standard deduction is a set amount based on a person's filing status.
As of the 2017 tax year, the standard deduction is $6,350 for single taxpayers and those who are married but filing separate returns, $12,700 if you're married and filing jointly or if you're a qualifying widow or widower with a dependent child, and $9,350 for those who qualify as head of household.
Most taxpayers claim the standard deduction.
When You Might Want to Itemize Deductions
It's to a taxpayer's advantage to itemize when the total of all his individual deductions exceeds the standard deduction for his filing status. Otherwise, it would make no sense—you'd be paying taxes on more income than you'd have to.
For example, if you're a single filer and you had total itemized deductions of $7,350 in 2017, you'd be better off going to the trouble of itemizing because this takes $1,000 more off your taxable income than the $6,350 standard deduction. But if you qualify as head of household, you'd end up paying taxes on an additional $2,000 if you itemized —the difference between $7,350 in itemized deductions and the the $9,340 standard deduction you'd be entitled to claim for this filing status.
But there's a potential wrinkle on the horizon. The Tax Cuts and Jobs Act that Congress is in the process of mulling over as of December 2017 would radically change the standard deduction amounts for 2018. The House of Representatives wants to increase the standard deduction to $12,200 for single filers, to $18,300 for heads of household, and to $24,400 for married taxpayers who file joint returns. The Senate is in the same ballpark: $12,000 for single filers, $18,000 for heads of household, and $24,000 for married taxpayers who file jointly.
If the Tax Cuts and Jobs Act is passed and signed into law, it will most likely take effect in 2018. It would require a lot of itemized deductions to surpass these new thresholds.
When a Taxpayer Must Itemize Deductions
Sometimes the decision to itemize or to claim the standard deduction is out of your hands. Married couples who file separate tax returns must each use the same method. They must both take the standard deduction or they must both itemize, so if your spouse itemizes, you're stuck with doing so as well unless you can convince him to change his mind.
Non-resident aliens must itemize. They're not eligible to take the standard deduction.
What Expenses Can Be Itemized?
The list of qualifying deductions is fairly extensive, and limitations apply to some of them. Generally, you can claim itemized deductions in the following categories, but some of these are subject to change as well under the pending legislation. And this list is by no means comprehensive. There are a few additional, less utilized itemized deductions.
- Medical and dental expenses (potentially eliminated by the House version of the Tax Cuts and Jobs Act, but expanded under the Senate's proposed version)
- State and local income taxes (potentially eliminated by both the House and Senate versions of the Tax Cuts and Jobs Act)
- Real estate taxes (capped at $10,000 by both the House and Senate versions of the pending legislation)
- Home mortgage interest (capped at mortgage debts of $500,000 by the House version of the Tax Cuts and Jobs Act; the Senate's version retains this deduction but limits it to acquisition debt only, not equity debt as has historically been the case)
- Gifts to charity
- Casualty or theft losses (potentially repealed by the Tax Cuts and Jobs Act)
- Unreimbursed employee expenses
- Tax preparation fees
- Investment expenses and fees
Medical and dental expenses include the cost of insurance premiums as long as your employer doesn't reimburse you for them, as well as certain qualifying medical and dental care costs. But you can only deduct the portion that exceeds 10 percent of your adjusted gross income as of 2017.
This means that if your AGI is $55,000 and you had $7,500 in qualifying medical expenses, your deduction would be limited to $2,000: the amount that exceeds $5,500 or 10 percent of your AGI. The Senate's version of the Tax Cuts and Jobs Act would decrease this limit to 7.5 percent, but only for two years.
Other Limitations on Itemized Deductions
Itemized deductions are also limited when a taxpayer's AGI exceeds certain limits based on his filing status. These limits are sometimes called Pease limitations because Representative Donald Pease first authored the legislation that provides for them back in 1990.
|For 2017, Itemized Deductions Start to Phase Out When AGI Reaches|
|Filing Status||Adjusted Gross Income Threshold|
|Married filing jointly and qualifying widow(er)||$313,800|
|Married filing separately||$156,900|
|Head of household||$287,650|
The total amount of the itemized deductions you can claim is reduced if your AGI exceeds the limit for your filing status. The reduction is either 3 percent of the amount by which your AGI exceeds the threshold or 80 percent of your total itemized deductions, whichever is less. You don't have to include deductions claimed for medical expenses, investment interest, casualty or theft losses, or gambling losses when you're calculating 80 percent of the total—at least as of 2017. This may change somewhat with the new tax legislation as well.
You can calculate the limitation on itemized deductions by using the "Itemized Deductions Worksheet – Line 29" found on page A-13 of the Instructions for Schedule A.
Tax laws change periodically and the above information may not reflect the most recent changes. Please consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.
Updated by Beverly Bird