Tax

Itemized Deductions: What are They? Complete Beginner’s Guide

A tax deduction is a benefit that lowers your tax liability by lowering your taxable income. Read on for our complete guide to itemized deductions
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As tax season approaches, the annoying voice in the back of your head keeps telling you to submit your return. Most of us procrastinate on this issue and then rush to get things done before the deadline.

This year is going to be different. You vow that you’re going to prepare better for your filing. You find yourself chatting with a friend about tax season while out for lunch one day.

They mention that, as a freelancer, you should consider itemizing your deductions. They go on to tell you that it can save you plenty when it comes to filing, giving your next tax return check a bit of a boost.

What? There’s a way to pay less tax? You’re all ears.

What Is a Tax Deduction?

A tax deduction is a benefit that lowers your tax liability by lowering your taxable income. By including deductions in your return, it could drop you into a lower tax bracket, reducing the amount of tax you need to pay on your annual earnings.

Deductions are expenses you incur during the tax year that you can subtract from your total earnings. Tax authorities at both the state and federal level set the standards that form the tax code annually.

Those taxpayers aware of eligible state and federal tax deductions can benefit from the tax deduction and service activities every year, with deductions available for both state and federal taxes.

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Should You Consider Itemizing Your Deductions?

Let’s walk you through which of your expenses you can deduct the next time your file. We’ll also look at when you should consider taking the standard deduction, and when you qualify for itemized deductions as well.

Have you ever spent time wondering what expenses you can itemize for deductions on your tax return? Do you understand what itemizing means? We’ll cover the basics of itemizing in this article, and give you precisely what you need to know to make this your best filing season ever.

Before we start, we want to make a quick note about the importance of tax prepping software. A good software package can assist you with identifying and itemizing all of the potential deductions in your annual expenses. The software can also show you if it’s a better idea to take the standardized deduction instead of itemizing your expenses.

TurboTax is one of the best software packages available when it comes to itemizing your expenses. Using the program, you can file your federal tax return for free. The software walks you through all of the itemized deduction options, so you feel confident when submitting your return.

What Does Itemizing Deductions Mean?

When you start the task of completing your federal tax return, the form requires you to either take a standardized deduction on your expenses or to calculate itemized deductions.

A standardized deduction is a rate set by the tax authorities based on whether you’re filing independently, or as a married person filing jointly.

Not everyone can qualify for itemized deductions on their tax return. In this case, you have no option but to accept the standardized deduction limits.

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How to Calculate Your Taxable Income

To calculate your taxable income, you’ll need to subtract the total of your itemized or standard deduction from your Adjusted Gross Income (AGI).

By subtracting your deductions from your AGI, you might find that you drop into a lower tax bracket, saving you hundreds or thousands of dollars on the tax you owe the federal government. It’s a worthwhile exercise that can boost your finances.

Itemized Deductions Explained

Throughout the year, you might incur expenses that you can write off against your personal income, reducing your tax burden. The government deems specific expenses tax deductible because you already pay tax on those items, or they are essential expenses that deserve a tax break.

If the total of your expenses is more than the standardized deduction amount, then it’s worth your while to itemize your deductions.

How Do You Qualify for Itemized Deductions?

There are plenty of expenses that qualify for an itemized deduction. Some of the most common include the following.

  • Interest charges on your mortgage
  • State, local income, and property taxes.
  • Investment interest expenses
  • Medical expenses
  • Charitable donations and contributions
  • Miscellaneous deductibles

When you take out a mortgage on your home, the bank charges your interest on the outstanding money you owe. It might surprise you to learn that you can deduct the interest charges on your mortgage from your taxable income as an itemized deduction.

The majority of American homeowners qualify for this itemized deduction because the government allows it for the first $1-million borrowed on your mortgage, and most Americans own a home that has a market value under $1-million.

You can take advantage of this itemized deduction on up to two properties. Therefore, if you have two homes valued at $500,000, you qualify for this deduction because the total is at the $1-million threshold.

The IRS also allows you to deduct the interest on your home equity loan, as long as it’s for an amount under $100,000.

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Real Estate and Income Taxes

If you’re a homeowner, then you can deduct the real estate taxes that you pay on your property. However, it’s important to note that you can’t deduct prepaid taxes. The legislation states that you can only deduct those property taxes that occur in the same tax year as your filing.

You may also deduct any local and state taxes from your AGI, as well. This point is a huge perk for many Americans because you might pay state income taxes, but you can only deduct those taxes if you itemize your deductions.

Investment Interest

For those Americans that start investing money, you can deduct investment expenses like your broker and advisory fees, as well as safe deposit fees. You may also itemize these deductions as well.

It’s also important to note that you can only deduct up to the limit of the amount you earn. Therefore, if you take a loss and your investment accounts don’t grow during the year, you won’t qualify for the deduction.

Medical Expenses

Medical expenses have limitations on what you can itemize for your deductions. The law states that you may only deduct expenses that exceed 10% of your AGI, or 7.5% if you’re over the age of 65.

Some of the qualifying medical expenses suitable for an itemized deduction include the following.

  • Co-payment amounts and doctors’ fees
  • Insurance premiums
  • Medication prescriptions
  • Necessary surgery
  • Physical handicap expenses
  • Medical transportation to a hospital

You also have the option of deducting 24-cents for each mile you drive related to medical treatment or care.

Charitable Donations

If you donated to a charity or gave away items during the year, you can list these gifts as an itemized deduction. People that give their church tithing can also record this expense as an itemized deduction as well.

However, contributions to political parties do not count towards itemized deductions. You need to donate to a qualified organization for the deduction to be valid.

There’s also a limit to this deduction, and you can’t claim for more than 50% of your AGI for any cash donations, and 30% of AGI for any property donations.

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Miscellaneous Deductibles

There are numerous miscellaneous deductions you can use in your filing. However, the IRS limits these expenses to 2% over your AGI. In other words, if you earn $100,00 per year, then you can only claim for miscellaneous expenses for the amount that’s over the 2% mark.

Therefore, if your total miscellaneous expenses were $3,000 for the year, you can only write up $1,000 of these expenses as an itemized deductible.

Some of the miscellaneous expenses that qualify for this deduction include business trip expenses, qualified education expenses, expenses for uniforms, tax prep fees, or the business use of your primary residence, as well as any subscriptions to professional journals.

There are dozens of qualifying expenses, so check the IRS website when filing.

How Do You Claim for Itemized Deductions?

When completing your 1040 form, you’ll notice a query that asks you to itemize your expenses or take the standard deduction rate. You’ll need the Schedule A form to calculate your itemized deductions, and you can find this form on the IRS website.

Schedule A walks you through all of the steps and calculations of each of the expenses mentioned previously. After completing your itemized estimate, you add it to your 1040 form in the field that asks you to list your itemized deductions.

What Are the Pros of Itemized Deductions?

  • Your itemized deductions may exceed the amount of the standard deduction.
  • The more deductions you have, the lower the amount of taxes you pay
  • You could end up in a lower tax bracket, reducing your tax burden
  • There are hundreds of deductible items

What Are the Cons of Itemized Deductions?

  • You need to understand and obey the rules
  • Some deductions items come with stipulations
  • You can only deduct a portion of some expenses, such as investment and medical expenses
  • It takes you longer to complete your return
  • You need proof of your expenses

What Does the “Standard Deduction” Entail?

Every year, the IRS sets a standard deduction rate that’s a flat-dollar amount measured by the amount of your AGI. By taking the standardized deduction, you’re going along with what the IRS deems worthy of deducting from your AGI.

In most cases, the standard deduction amount is very close to what you get from itemizing your deductions, especially if you aren’t a business owner. By selecting the standardized deduction option, you waive your right to itemize your expenses on your tax return.

Why Should You Use a Standard Deduction?

There are a few reasons that you should consider filing for a standardized deduction. It’s a faster process, and you don’t have to worry about purchasing software or hiring an accountant to do the job. (Both of which you can claim back for with your itemized deduction.)

However, the standardized deduction might be as much or more than your itemized deduction. This statement is especially true if you don’t own a home, have any investments, and you have minimal business expenses throughout the year.

The IRS is reasonably generous with the standardized deduction amount, and it increases every year to pace inflation. Here’s what you can expect from the 2019 / 2020 tax season.

Filing status2019 tax year2020 tax year
Single$12,200$12,400
Married, filing jointly$24,400$24,800
Married, filing separately$12,200$12,400
Head of household$18,350$18,650

Some people might qualify for more or less than the standard amount. For example, people over the age of 65, or people dealing with a disability like blindness might qualify for more.

How Do You Decide on the Itemized or Standard Deduction?

It all boils down to your expenses and what you can prove with your itemized deduction. If you do the calculation, and you find that your costs are higher than the standardized deduction amount, it’s worth your while to take the itemized route.

However, if your expenses amount to less than the standardized deduction, you’re wasting your time. Still, you’ll need to complete the exercise to see if you qualify, and the final expense amount you need to list on your tax return.

Wrapping Up – Key Takeaways

You need to choose whether you want to file an itemized or standardized deduction this filing season.

If you can’t itemize your expenses, you’ll need to complete and file Form 1040-EZ. This form is a simpler version of 1040.

You can use tax software like TurboTax to automatically file your return for free.

If you bought real estate this financial year, then you probably qualify for itemization.

Regardless of whether you use a standardized or itemized deduction, both save you money and lower your tax burden to the government.

After you get the hang of calculating your deductible expenses, keep records of all of your expenses that are eligible for deductions the following tax season.

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Oliver Dale is Editor-in-Chief of MoneyCheck and founder of Kooc Media Ltd, A UK-Based Online Publishing company. A Technology Entrepreneur with over 15 years of professional experience in Investing and UK Business.His writing has been quoted by Nasdaq, Dow Jones, Investopedia, The New Yorker, Forbes, Techcrunch & More.He built Money Check to bring the highest level of education about personal finance to the general public with clear and unbiased reporting.oliver@moneycheck.com


Editorial Disclaimer: Opinions expressed here are the author’s alone, not those of any bank or credit card issuer and have not been reviewed, approved or otherwise endorsed by any of these entities.


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