When you file your income taxes, the Internal Revenue Service (IRS) allows you to choose whether to claim the standard deduction or to itemize your deductions to reduce their taxable income. While some taxpayers benefit by claiming the standard deduction, it's important not to overlook the option to itemize. If you do, you run the risk of paying more taxes than you have to.
Medical and Dental Expenses
Any medical, dental and vision expenses you incur during the year can be included on your itemized deduction. Insurance premiums paid with after-tax dollars can also be included. However, you cannot include costs that you pay with pretax dollars or that you are reimbursed for, such as through your employer or your insurance policy. The downside to the deduction is that it is limited to only the expenses in excess of 7.5 percent of your adjusted gross income. For example, if your AGI is $200,000 and you have $15,000 of medical expenses, there would be no deduction because $15,000 does not exceed 7.5 percent of your AGI. However, if your AGI is only $100,000 and you have $15,000 of medical expenses, your deduction would be $7,500.
The IRS specifies several types of taxes that can be deducted from your income for federal taxes when you itemize. This includes state and local income and sales taxes, real estate taxes and personal property taxes. However, you can only claim either your state and local income taxes or your state and local sales taxes, but not both. For most people, the income taxes yield the greater deduction, but if you made significant purchases during the year and live in an area with a high sales tax, you may be better off claiming the sales taxes. To qualify as a real estate tax or personal property tax, the tax must be levied on all property or items of the same kind in the area, and the tax must be based on the value of the property. For example, a car registration fee based on the value of the car is deductible, but a tax based on the weight of the car would not be deductible.
The tax code prohibits a deduction for personal interest expenses, but does make several exceptions including mortgage interest and investment interest. Mortgage interest on up to $1 million of home acquisition debt and $100,000 of home equity debt can be deducted. These limits are halved if you are married and filing separately. Home acquisition debt refers to money borrowed to purchase, build or improve a home while home equity debt refers to debt secured by a home, but used for any other purpose. You can also deduct discount points and certain mortgage insurance premiums. In addition, if you borrow money to invest you can also include that cost as a deduction. For example, if you borrowed money to invest in a stock, that interest is deductible.
Donations of cash or property to qualified charities can be included in your itemized deductions. For cash, the amount you donate is the amount you can deduct. Donations of property cannot be deducted for more than the fair market value, but there are cases when the donation cannot exceed the amount you paid for it. When you make a donation of tangible personal property, such as food or furniture, you must reduce the fair market value of the item by the amount of ordinary gain on the item. Ordinary gain occurs when you've owned the item for less than one year. For example, if you only pay 15 cents per pound of food when it has a fair market value of $1, and you purchase and donate 100 lbs., your deduction is limited to $15, which is the amount you paid, not the fair market value of $100.
Casualty and Other Miscellaneous Deductions
Casualty losses refer to unreimbursed losses caused by theft, fire, storm and other similar causes. You can only deduct the amount by which each loss exceeds $100 and the amount by which the total losses exceed 10 percent of your AGI. Other miscellaneous deductions are subject to a lower threshold of 2 percent. These include employee expenses, such as continuing education costs or uniforms that cannot be used for everyday use; tax preparation fees; and the convenience fees charged by credit cards to pay your taxes.
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