The federal Itemized Deduction is the total of four main categories of allowable deductions: medical expenses, taxes paid, interest paid, and gifts to charity. Limitations may apply to each of these categories.
Medical Expenses
You can deduct medical and dental expenses (net of any insurance reimbursement) that exceed 7.5% of the amount of your Adjusted Gross Income. These expenses must be paid by you on behalf of you, your spouse, or your dependent.
For an expansive list of qualified and nonqualified expenses, review the instructions to Schedule A. The most common qualified expenses are: health or long-term care insurance premiums paid out-of-pocket, prescription medication, doctor visits and exams, eyeglasses or contacts, rehab or nursing care facility (subject to limitations).
Tax Paid
In general, a taxpayer may report up to $10,000 of qualified tax expenses, including
- Real estate taxes paid during the year on personal real estate owned by the taxpayer, and
- The larger of:
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- State and local income tax paid during the year, and
- State and local general sales tax paid during the year.
Mortgage Interest Paid
The rules for deducting interest can vary depending on whether the loan proceeds are used for business, personal, or investment activities. The information below is specific to mortgage interest for a personal residence.
- A home mortgage is any loan that is secured by your main home or second home, regardless of how the loan is labeled. It includes first and second mortgages, home equity loans, and refinanced mortgages.
- A home can be a house, condominium, cooperative, mobile home, boat or similar property. It must provide basic living accommodations including sleeping space, toilet, and cooking facility.
- You can only deduct home mortgage interest to the extent that the loan proceeds from your home mortgage are used to buy, build, or substantially improve the home securing the loan (“qualifying debt”).
- Limit on loans taken out:
- On or before December 15, 2017 – you can only deduct home mortgage interest paid on debt up to $1,000,000 ($500,000 if you are married filing separately).
- after December 15, 2017 – you can only deduct home mortgage interest paid on debt up to $750,000 ($375,000 if you are married filing separately).
Gifts to Charity (cash and non-cash)
You can deduct contributions or gifts you gave to qualified organizations that are religious, charitable, educational, scientific, or literary in purpose. To verify an organization’s charitable status, you can:
- Check with the organization to which you made the donation. The organization should be able to provide you with verification of its charitable status.
- Use the IRS’ online search tool at IRS.gov/TEOS to see if an organization is eligible to receive tax-deductible contributions.
For an expansive list of qualified and nonqualified expenses, review the instructions to Schedule A. The most common types of charitable gifts include cash donations, goods and clothing, appreciated stock, and personal expenses incurred when conducting volunteer activities. If you drove to and from the volunteer work, you can take the actual cost of gas and oil or 14 cents a mile. Add parking and tolls to the amount you claim under either method. But don’t deduct any amounts that were repaid to you.
If you made a gift and received a benefit in return, such as food, entertainment, or merchandise, you can generally only deduct the amount that is more than the value of the benefit. But this rule doesn’t apply to certain membership benefits provided in return for an annual payment of $75 or less or to certain items or benefits of token value.
Gifts of non-cash items are subject to additional reporting requirements on your tax return.
The allowable tax deduction resulting from your total gifts to charity may be limited based on charity type and your Adjusted Gross Income. Any unused deduction may carry forward to be claimed on a future tax return.
Miscellaneous Notes
You may be able to deduct personal casualty and theft losses attributable to a federally declared disaster (subject to limitation).
Gambling losses may be deducted, but only to the extent of gambling winnings.
What were previously categorized as “Miscellaneous Itemized Deductions” (including: attorney fees, tax prep fees, safe deposit box, unreimbursed employee expenses) do not exist under current tax law.
Consider “bunching” tax-deductible expenses in a single tax year to exceed the Standard Deduction amount. Bunching typically works well with health expenses, property taxes, and gifts to charity.
Remember that, although you may not itemize on your federal return, many states may offer deductions or other tax incentives relating to certain itemized deductions. Consult with your tax preparer to ensure you maximize state tax savings opportunities.