Taxpayers can use the higher of either the standard deduction or the itemized deduction. It’s worth the effort to compare the two methods because it can result in noticeably lower taxable income if you have enough qualifying expenses. Various types of deductible personal expenses can be itemized using Form 1040, Schedule A. Examples are as follows:
Medical and Dental Expenses
Expenses that exceed 7.5% of adjusted gross income are deductible. Medical and dental care, prescriptions, diagnostics, and insurance not otherwise deducted (pre-tax) from wages are deductible.
Taxes you paid
Specific types of State and local taxes that you paid during the year are deductible on Schedule A. This includes the following:
- State and local income taxes
- Real estate taxes on property not used for a business
- Some personal property taxes
- General sales taxes
To calculate the general sales tax deduction, use either your actual sales tax paid, or calculate the deduction using the optional sales tax tables. The sales tax tables take into account your adjusted gross income, filing status, number of dependents, local sales tax rates and any large purchases. In this case, remember to include sales tax on major purchases such as a vehicle, boat or home renovation.
Interest you paid
Interest paid on first or second mortgages, home equity loans or refinance can be deducted up to certain loan amounts. The loan must be secured by your main home or a second home. A house, condo, co-op, mobile home, or boat that provides sleeping, toilet and cooking facilities all qualify. Deductions can also be allowed for points and mortgage insurance premiums.
Gifts to charity
Gifts to Charity made to qualified charitable organizations can be in cash, property, investments, or intangibles. Deduction limits range from 100% to 20% of adjusted gross income depending on type of organization and type of property.
Casualty and Theft Losses
Casualty and Theft Losses, less the first $100, that exceed 10% of adjusted gross income can be deducted if the losses are attributed to a federally declared disaster.
Complex rules apply to each type of deduction. Before you choose the standard deduction, ask your tax accountant to evaluate your situation. The itemized deduction is only worth using if it is higher than your standard deduction. This happens if you qualify for enough expenses to make itemized deductions on Schedule A work for you.