When you file your taxes, good old Uncle Sam lets you choose between the standard deduction for your filing status or the sum of your itemized deductions. All the itemized write-offs appear on Schedule A, so knowing what you're allowed to take if you give up your standard deduction helps you choose the best option for lowering your tax bill.
If you have significant medical expenses, you might be able to write off a portion of the costs on Schedule A. However, you're limited to including only unreimbursed costs and deducting only the amount by which they exceed 7.5 percent of your adjusted gross income. Qualifying costs include checkups, preventive care, diagnosis, treatment, surgery, and prescription drugs for yourself, your spouse and your dependents.
The deductible taxes portion of Schedule A comes with a choice: state, local and foreign income taxes or state and local sales taxes -- you can't claim both in the same year. In addition, you're also allowed to write off real estate taxes and personal property taxes. These taxes must be based on the value of the property and they must be assessed at least annually. For example, if you pay a flat fee to register your car, you can't include that cost. But, if you pay a personal property tax based on the value of your car, that counts.
Deductible interest falls into two general categories: home mortgage interest and investment interest. You can deduct the interest on up to $1 million of your home mortgage, or $500,000 if you're married filing separately. Investment interest includes interest you paid on loans that you used to fund investments. For example, if you borrowed money to buy stock and paid $1,000 in interest, you could count that toward the investment interest deduction. However, your deduction can't exceed your net investment income for the year.
Donations to charity also appear on Schedule A. Only donations to qualified charities count -- donations to individuals are never deductible even if they really need the money. If you're giving property, the general rule is that you can deduct the fair market value, but there are several exceptions that could limit your deduction, including deductions for donations of vehicles or items that have increased in value since you bought them.
Casualty and Theft Losses
You also use Schedule A to report deductions for casualty and theft losses. Casualty and theft losses include unreimbursed losses from things like theft, vandalism, fire, storm, or other natural disasters. However, your deduction is limited to only the portion of the loss from each event that exceeds $100, and then you're limited to deducting the total of those amounts minus 10 percent of your adjusted gross income. In other words, unless you have a major loss, it won't help.
The last category of deductions taken on Schedule A are miscellaneous deductions. Some are subject to a 2 percent of AGI floor, which means you can only deduct the portion that exceeds 2 percent of your AGI. These include unreimbursed employee expenses like union dues or work-related education and tax preparation fees. Other miscellaneous deductions are not hit with the AGI floor, such as gambling losses -- which are capped at your gambling winnings for the year -- and losses from Ponzi schemes.
- Internal Revenue Service: Schedule A Instructions
- Internal Revenue Service: Topic 503 -- Deductible Taxes
- Internal Revenue Service: Topic 505 -- Interest Expense
- Internal Revenue Service: Publication 526 -- Charitable Contributions
- Internal Revenue Service: Topic 502 -- Medical and Dental Expenses
- Internal Revenue Service: Publiction 529 -- Miscellaneous Deductions
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