Uncle Sam offers you a quick and easy way to reduce your taxable income with the standard deduction, but you can opt out and instead claim the total of your itemized deductions. It can take some extra time in record-keeping during the year and a little more paperwork when you're filing your taxes, but it can also save some serious dough.
Itemized deductions fall into several categories: medical and dental expenses, taxes, interest, interest, charitable donations, casualty and theft losses, and miscellaneous deductions. Deductible taxes include property taxes and real estate taxes, as well as either your state and local income taxes or sales taxes. Interest deductions include only home mortgage interest and investment interest -- and your investment interest deduction is limited to your investment income. Miscellaneous deductions include unreimbursed employee expenses, tax preparation costs and union dues.
Some of the itemized deductions have adjusted gross income thresholds, which limit the amount you can deduct to your costs in excess of a certain percentage of your AGI. As of the 2012 tax year you can only deduct the portion of your medical and dental expenses the exceed 7.5 percent of your AGI and the portion of certain miscellaneous deductions, such as unreimbursed employee expenses or tax prep costs, that exceeds 2 percent of your AGI. For example, pretend your AGI is $70,000 and you have $12,250 of medical expenses. You'll only be able to deduct $7,000 from your taxable income. In the 2013 tax year, the 7.5 percent figure increases to 10 percent, meaning you will be able to deduct less.
If you want to itemize, you must use Form 1040 for your tax return and attach Schedule A. Report each itemized deduction on the appropriate line of Schedule A and then total each category. The sum of all your itemized deductions goes on line 29 of Schedule A and then gets copied to line 40 of Form 1040. Of course, this means you can't claim your standard deduction because the total takes its place.
If you're married filing jointly, include all the itemized deductions from both spouses on the same Schedule A. If you and your spouse file separately, you both have to itemize -- you can't have one spouse claim all the itemized deductions and the other claim the standard deduction. If you live in a community property state and you file separately, each spouse gets to claim half the couple's itemized deductions. The other states allocate your itemized deductions based on who incurred the costs.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."