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An Overview of Itemized Deductions
An Overview of Itemized Deductions
An Overview of Itemized Deductions
The requirements for itemized deductions can be hard to meet for many
people. But some deductions are available without itemizing: above-the-line
deductions.All of the above-the-line deductions can be found on Form 1040 in the
section Adjusted Gross Income. Some of the deductions require additional forms
and some dont.
Educator Expenses: This deduction allows teachers both public and private
a deduction of up to $250 ($500 for married couples who are both teachers)
for necessary educational supplies and expenses. Kindergarten through grade
12 teachers, instructors, counselors, principals, or aides who work at least 900
hours during the school year are eligible for the deduction. For more details
about this deduction, see IRS Pub 529.
Moving Expenses: If you moved during the year for a new job or business,
you may be eligible to deduct moving expenses. Expenses such as moving
vans, storage, and transportation can be deducted.
Next, if youre self-employed you can deduct contributions you made to a SEP
IRA or other retirement account. Check IRS Pub 560 for more information
about this deduction and how much you can deduct.
The last above-the-line deduction for self-employed taxpayers is for insurance
premiums. You can deduct any premiums for insurance for you, your spouse,
and dependent children. The premium must be established under your
business in order to claim the deduction. For this deduction, use the SEHI Self-
Employed Health Insurance screen on your 1040.com return. For more
information about this deduction or any other self-employment deductions, see
IRS Pub 535.
Student Loan Interest: If youre paying back any student loans, you may be
able to deduct any interest you paid throughout the year, up to $2,500.
Tuition and Fees: If you attend a qualified college or university, you may be
eligible to deduct any tuition and fees . You can't claim this deduction and
an education credit for the same expenses. Enter your expenses on our Form
1098-T and Education Expensesscreen on your 1040.com return.
Income tax deductions are items that reduce your taxable income. But, theres more to the story.
Its important to be aware that not all deductions are created equal.
For instance, some deductions can be taken above the line on your tax return. Above-the-line
deductions are subtracted from your income before the adjusted gross income (AGI) is calculated
for tax purposes. This would include items such as losses on a property sale, alimony payments
and educational expenses.
However, the amount of above-the-line deductions you take, directly affects the amount and type
of below-the-line deductions for which youre eligible. Below-the-line deductions include any
deduction reported on a line that comes after the AGI calculation on a return.
While both deductions ultimately reduce your taxable income, some can have a more favorable
impact on your tax bill than others. In most cases, above-the-line deductions are the better
choice. Heres why.
Each tax season, you have the choice to deduct your actual itemized deductions or take the
standard deduction. Typically the choice is determined by whichever amount is higher.
If your total itemized deductions are less than the standard deduction, you may not receive any
benefit from a tentative itemized deduction.
Above-the-line deductions benefit you whether or not you itemize your deductions.
These adjustments include items such as traditional IRA contributions, moving and education
expenses, alimony payments and the deductible portion of self-employment tax.
Above-the-line deductions can also refer to business deductions and losses. For example, a
business expense reduces your net business income, which therefore reduces your total income.
For example, you can only deduct medical expenses as itemized deductions to the extent they
exceed 10 percent of your AGI (7.5 percent if you or your spouse are over age 65).
Every dollar that reduces your AGI not only reduces your taxable income, but it may help you
qualify for other deductions as well.
Various credits are limited by your adjusted gross income. In some cases, an adjustment may
help you qualify for a credit or other tax perk that you would not receive otherwise.
For example, you can deduct the real estate tax paid on your home as an itemized deduction.
However, if you have a small business, you may qualify to deduct a portion of your real estate
tax as a business expense.
In most cases, youre better off taking an expense as a business deduction whenever possible.
Not only is it an above-the-line deduction, but it may also reduce the amount self-employment
tax you pay.
However, you must reduce your total itemized medical expenses, including insurance premiums,
by 10 percent of your adjusted gross income (7.5 percent through 2016 if you are over age 65).
This must be done before you include them with your itemized deductions. (TaxAct performs
this calculation for you.)
If you qualify, youll benefit more by taking the self-employed health insurance deduction,
which is an above-the-line adjustment to income.
(TMFSelena)
As we enter the heart of tax season, there's a concept that's lost on many people -- that
not all deductions have the same value. That's because it matters whether they're
"above the line" or "below the line."
The line, in a sense, is your adjusted gross income (AGI), on which your taxes are
largely calculated. Above-the-line deductions are taken before you arrive at your final
AGI; they appear either as subtractions from income items or as explicit deductions on
your 1040 and help you actually arrive at your AGI. Below-the-line deductions are taken
after you have determined your AGI and can reduce your taxable income further.
Now think of the whole process this way: You start with your gross income and subtract
your above-the-line deductions, arriving at your AGI. Then you subtract your below-the-
line deductions or the standard deduction (whichever is greater) to arrive at your taxable
income.
Here's how our tax expert, Roy Lewis, has explained the difference in the deductions:
"Above-the-line deductions are generally more beneficial than below-the-line deductions
because they not only reduce your taxable income, but also reduce your AGI, which
may favorably affect many of your subsequent computations. Below-the-line deductions
simply reduce your taxable income."
So in a nutshell, above-the-line deductions will always lower your taxes, but below-the-
line ones may not, if they don't exceed your standard deduction amount. Those who are
self-employed will have more above-the-line deductions, but even those who aren't
might benefit by keeping better records of their expenses. If you have enough
deductions to itemize them instead of taking the standard deduction, you can cut your
taxes.
Also, as an investor, be sure to make the most of losses on stocks. Although it's too late
to sell and take losses on your 2006 return, it's never too early to think about your 2007
taxes. For instance, if you lost money on poor-performing stocks like Sirius
Satellite (NASDAQ:SIRI), or on Marvell Technology (NASDAQ:MRVL), you can at
least ease the pain a little by reducing your taxes.
Learn much more about taxes in our Tax Center and about stock-loss calculations in
particular in this article. Get answers to your tax questions on our Tax Strategies
discussion board.
Get new ideas on how to save money year-round when you give the Motley Fool Green
Lightnewsletter a try.
Longtime Fool contributor Selena Maranjian does not own shares of any companies
mentioned in this article.
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Moving Expenses
The costs of transporting household goods from one residence to another
are usually fully deductible, provided that they are not reimbursed by the
taxpayer's employer. The move must be made for work or business
reasons, and the taxpayer's new place of employment must be at least 50
miles further away from the taxpayer's previous residence than the
previous workplace was from there.
Alimony
Payments made to a spouse pursuant to a divorce decree that are not
classified as child support are usually counted as alimony. All payments of
this type are deductible from gross income.
Educator Expenses
These include unreimbursed qualified expenses of up to $250 ($500 for
joint filers if both are in this category). Qualified expenses include teaching
equipment, supplies, books and other ordinary expenses that are
commonly associated with education. This deduction is available for
education professionals who teach grades K-12 and work at least 900
hours during the year.
Conclusion
Any or all of these deductions can be taken in addition to the itemized deductions
for eligible taxpayers. Of course, there are also several incidental rules and
limitations on most of these deductions that are not covered here. For more
information on above-the-line deductions, read the instructions for the 1040 Form
on the IRS website or consult your tax advisor. (To learn more, see The 10 Most
Overlooked Tax Deductions.)
An Overview of Itemized
Deductions
By Mark P. Cussen, CFP, CMFC, AFC | Updated November 30, 2016
3:23 PM EST
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When you file your taxes each year, you have the choice of either taking
the standard deduction or itemizing your deductions. The standard deduction is a
preset amount that you are allowed to deduct from your taxable income each
year. This amount will vary according to your tax filing status and is indexed
annually to keep up with inflation. Every year, millions of taxpayers are able to
claim a larger deduction on their tax returns as a result of itemizing their
deductions but this won't work for everyone. To make the most out of your tax
return, read on to learn when to itemize your deductions and when to stick with
the standard deduction.
Once itemized deductions have been subtracted from your income, the
remainder is your actual taxable income. Itemized deductions were created as a
social-engineering tool by the government to provide economic incentives for
taxpayers to do certain things, such as buy houses and make donations to
charities. (To learn how taxes evolved to the 1040s we see today, read Paying
Uncle Sam: From Tobacco to $1 Trillion and Tablets to 1040s: How Taxes Began.)
The following is a brief overview of the scope and limits of each category of
itemized deduction:
Interest Expenses Homeowners can deduct the interest that they pay
on their mortgages and home equity lines of credit.
Each year, mortgage lenders mail Form 1098 to borrowers, which details
the exact amount of deductible interest and points that they've paid over
the past year. Taxpayers who bought or refinanced homes during the year
can also deduct the points that they've paid, within certain guidelines.
Taxes Paid Taxpayers who itemize are able to deduct two types of taxes
paid on their Schedule A: Personal property taxes, which include real
estate taxes, are deductible along with state and local taxes that were
assessed for the previous year. However, any refund received by
the taxpayer from the state in the previous year must be counted as
income if the taxpayer itemized deductions in the previous year.
Remember to Aggregate
There are times when the additional deduction realized from excess medical or
job-related expenses will allow itemized deductions to exceed the standard
deduction; therefore, you should not simply assume that you cannot deduct
miscellaneous expenses or that you cannot itemize deductions if your itemizable
deductions are insufficient by themselves for you to qualify. (For more on this
see Which is better for tax deductions, itemization or a standard deduction?)
Should you itemize your deductions? Its a question you will have to answer when you start
filing your tax return. Heres a quick look at whats deductible and when you should take the
standard deduction and when you should itemize.
Have you ever wondered if you can itemize deductions on your tax return? Actually, have
you ever wondered what, exactly, itemizing means? If so, youve come to the right place. Im
going to teach you the basics of itemizing: What itemizing is, whether or not you qualify to
itemize and, if so, how to do it.
Note: Tax prep software can walk you through all potential deductions and even determine if
its best to itemize or take the standard deduction. Find out why we recommend TurboTax
and how you can use it to file your simple federal return for free.
When youre filling out your federal tax return this year, youll be asked to either calculate
your itemized deductions or to take the standard deductionan amount predefined by the
IRS and based upon your filing status (e.g., single or married filing jointly). If you dont
qualify to itemize deductions, you will choose the standard deduction.
To find your taxable income, you must subtract the standard or itemized deduction from your
Adjusted Gross Income (AGI). To be blunt, these deductions are our friends because they
lower the amount of taxes that we have to pay.
Itemized deductions are comprised of various types of certain expenses that you incur
throughout the year (things that aresurprise, surprisetax-deductable). If the total
amount of these expenses is greater than the standard deduction amount, you should
itemize instead of taking the standard deduction.
For example, the 2014 standard deduction for single taxpayers is $6,200. If the amount you
spent on qualified itemized deductions (see below) is greater than $6,200, then you should
itemize on your tax return. For 2015 the standard deduction for a single taxpayer is $6,300.
The most common expenses that qualify for itemized deductions include:
Medical expenses
Charitable contributions
Miscellaneous deductions
If you took out a mortgage to purchase a home, the interest on that mortgage is deductible
as an itemized deduction. Most people qualify for this deduction because it is allowed on up
to the first $1,000,000 borrowed on a mortgage. This deduction is allowed for two
residences per taxpayer. You can also deduct interest on a home equity loan as long as that
loan is less than $100,000.
TAXES
If you own a home, you can deduct the real estate taxes that you pay on your home.
However, you cannot deduct prepaid taxes; you can only deduct those taxes which are
allocated to the year in which you are filing your taxes for. You can also deduct any state
and local taxes (sometimes referred to as city tax) that you paid on your income during the
year. This is a huge perk of itemizing (because most taxpayers pay state income tax but you
can only deduct those taxes if you itemize deductions).
When you start investing, you may incur expenses like broker or advisor fees or safe deposit
box fees. You can deduct these as itemized deductions. Just be careful: You can only
deduct up to the amount that you earn through your investments. So, if you had a bad year
and didnt earn anything, you cannot deduct these expenses. (However, you may be eligible
for Capital Loss treatment.)
MEDICAL EXPENSES
Medical expenses are deductible as itemized deductions, but in a very limited way. You can
only deduct the amount of medical expenses that exceed 10 percent of your AGI (7.5
percent if youre over 65).
For example, if your AGI was $50,000 and you spent $5,500 in medical expenses during the
year, you could only deduct $500 ($50,000 * .1 = $5,000).
Some qualifying medical expenses include: prescriptions, doctors fees/co-pays, insurance
premiums, necessary surgery (not cosmetic), physical handicap costs, and transportation to
a medical facility. You can also deduct 24 cents for every mile you drove for medical care.
CHARITABLE CONTRIBUTIONS
If you were generous during the tax year and gave money or property to your favorite
charity, you can deduct these gifts as an itemized deduction. Tithing to your church is
included in this deduction. Contributions to political campaigns or needy families are NOT
included in this deduction. (You must donate to a qualified organization to claim the
deduction). The deduction is only limited to 50 percent of your AGI for cash donations and
30 percent of your AGI for property donations.
MISCELLANEOUS DEDUCTIONS
There are some miscellaneous deductions that you can claim, but you can only deduct
these expenses by the amount that they exceed two percent of your AGI. These expenses
include: unreimbursed business expenses, qualified educational expenses, expenses for
uniforms, tax preparation fees, business use of your home, subscriptions to professional
journals, and job-hunting expenses. These are just a few, so consult the IRS Website if you
have a question about one of your expenses.
When you are filing out your 1040, you will see a question asking you to itemize or take the
standard deduction towards the top of page two. You will need to use a separate form
Schedule A to calculate your itemized deductions. This form can be found on the IRS
website along with your 1040 form. The Schedule A form will walk you through the steps
and calculations of each expense that I listed above. You will take the final amount on the
Schedule A form and put it into your 1040 form where it asks for itemized deductions.
Things To Remember
Here are some helpful tips to summarize the itemized deductions process:
If your itemized deductions are greater than $6,200 for 2014, you should itemize ($6,300 for
2015)
If your itemized deductions are less than $6,200 for 2014, you should take the standard
deduction
If you cannot itemize, you might be able to file a form 1040-EZ which is a shorter and
simpler version of the traditional 1040 form. You may also be able to file your federal tax
return using TubroTax absolutely free.
If you bought a house this year, there is a good chance that you will now be eligible to
itemize
Remember that no matter which deduction you choose, these deductions are your friend
they help you by allowing you to pay fewer taxes. Once you get the hang of itemizing your
deductions, start to keep detailed records of all your eligible expenses. This will help to
make the tax process that much less painful.