Itemizing your deductions versus taking the standard deduction is a personal choice – you want the option that saves you the most tax dollars. Although exceptions exist in a couple of categories, the Internal Revenue Service generally doesn't set a minimum for the amount of deductions you must have before you can itemize. In fact, the IRS has a few rules that prevent you from claiming too much.
Not every dime you spend is tax deductible. Allowable itemized tax deductions fall into a handful of categories, such as expenses for medical or dental care, including some insurance premiums. Mortgage interest and property taxes count as deductions, as well as sales taxes and some miscellaneous expenses that generally relate to the costs of doing your job. You can also deduct casualty losses and charitable contributions. The overall itemized deduction on your tax return is the total of all these expenses.
The IRS imposes some thresholds on certain deduction categories. If you want to claim medical or dental expenses or miscellaneous expenses, they must exceed a percentage of your adjusted gross income; you can only claim the balance. Medical expenses have a 10 percent limit as of 2013. If your AGI is $125,000, these expenses must exceed $12,500 before you can claim them. The threshold for miscellaneous expenses is 2 percent, so you'd only need $2,500 in expenses in this category.
The IRS further limits miscellaneous deductions for high-income taxpayers, as well as deductions for charitable contributions, mortgage interest and taxes. These are called Pease limitations, and they can affect you if you're married and file jointly with your spouse and report income of $300,000 or more. If you and your spouse file separately, the threshold is half this limit – $150,000 for each of you. Otherwise, if you're single, Pease limitations kick in when you earn $250,000, or $275,000 if you qualify for head of household status. Pease limitations are a complicated equation, but they basically come down to a limit of 3 percent of your AGI, or 80 percent of what you could have claimed if you didn't earn quite so much. You must use whichever number is lower. This rule doesn't require that your deductions reach a certain threshold; it reduces your deductions.
The standard deduction is the same across the board for everyone in each filing status. If you're married and file jointly, it's $12,200 as of 2013. It's half this amount or $6,100 if you're single or married and filing separately. If you're over 65, or if you're blind, the IRS lets you tack on an additional $1,200 to $1,500. If this comes out to more than your total itemized deductions, you're typically better off skipping the math and just claiming this deduction.
Alternative Minimum Tax
If you get caught in the trap of having to pay the alternative minimum tax, the situation becomes much more complicated and you might want to speak with a tax professional. AMT calculations eliminate the standard deduction entirely, and they take away many itemized deductions as well, but they also exempt a large portion of your income from taxation instead.
- Bankrate.com: Standard or Itemized Tax Deduction?
- H&R block: Standard Deduction Vs. Itemized Deduction
- Forbes: IRS Announces 2013 Standard Deduction Amounts and More
- IRS: Itemized Deductions
- Forbes: Pease Limitation Puts a Lid on Itemized Deductions for Wealthy Folks
- IRS: Medical and Dental Expenses
- TurboTax: Alternative Minimum Tax – Common Questions
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.