Itemized Deductions – The Seven Categories

Standard Deduction vs. Itemized Deduction 

There is often confusion during tax time when talking about how or when to take itemized deductions. The standard deduction is applicable only if it exceeds a taxpayer’s allowable itemized deductions. The basic standard deduction depends on your filing status and is adjusted for inflation. For 2014, the standard deductions are:

• $12,400 married filing joint
• $6,200 single
• $9,100 head of household
• $6,200 married filing separately

There are multiple categories of itemized deductions that we will briefly outline below.  For example, itemized deductions can include charitable contributions, interest expenses, state and local taxes, medical and dental costs, casualty and theft losses, job and investment expenses, and certain educational costs. If the itemized deductions exceed the standard deduction then the taxpayer should file the Schedule A of Form 1040. Below are eight categories to consider when looking at itemized deductions however please note that each situation is different and this list is not all-inclusive.

Seven Categories of Itemized Deductions

1. Unreimbursed Medical Expense

In order for a medical expense to count the medical expenses must exceed 10% of Adjusted Gross Income (AGI) if under age 65.  Unfortunately, this prevents many people from claiming this deduction.

These are some of the types of allowable medical care costs.

• Medicine & Drugs (Prescriptions Only)
• Diagnostic Tests
• Health Insurance Premiums
• Smoking Cessation
• Weight Reduction Programs

Example: If you and your spouse have a combined $100,000 AGI then the medical expenses would have to be more than $10,000 in order to be allowable.

2. Taxes

Here are some types of deductible taxes.

• Real Estate Taxes
• State and Local Income Taxes
• State Sales Tax – Only if state does not have income tax
• State or Local tax based on personal property such as Kentucky Vehicle License Fees

3. Interest Expense

These are some types of deductible interest.

• Qualified Home Mortgages
• Home Equity Loans
• Interest on Loans to Carry Investments but only to the extent of net investment income
• Personal or Consumer Loan Interest are NOT DEDUCTIBLE
• Deduction may be reduced for High-Income Taxpayers

4. Charitable Contributions

Here are some types of deductible donations.

• Religious Organizations (Tithes)
• Charitable Organizations 501(c)3
• Educational Organizations
• Un-reimbursed Volunteer Mileage and Travel Expense (14 cents per mile)
• Contributions is generally limited to 50% of adjusted gross income
• Deduction maybe reduced for High-Income Taxpayers
• Receipt is required for donated property valued over $250

5. Casualty and Theft Loss

Much like the medical expenses, for the casualty and theft loss to count it must exceed 10% of Adjusted Gross Income (AGI).  Due to the 10% AGI requirement it is difficult for many people to claim this deduction.

Below are some categories of personal property losses causes.

• Storms
• Fires
• Other Natural Events
• Result of Theft

Example: If you and your spouse have a combined $100,000 AGI then the loss would have to be more than $10,000 in order to be allowable.

6. Un-reimbursed Job Expenses

For un-reimbursed job expenses to count they must exceed 2% of Adjusted Gross Income (AGI).

Types of Deductible Job Expenses

• Union Dues
• Professional and Business Association Dues
• Job Educational Course
• Work Clothes (Required Uniform)
• Travel, Meals, and Entertainment on Trips Away from Home
• Small Tools (Must have Receipts and Prove Business Necessity for the Tools)
• Cost of Computer (Must meet Substantial Business need of the Employer)
• Cell Phone, Calculators, Copiers (Must Prove the Equipment was needed for your Job and Keep record of Time if is used for Business)

Example: If you and your spouse have a combined $100,000 AGI then the loss would have to be more than $2,000 in order to be allowable.  As a result, if you have $2,500 in un-reimbursed job expenses then your deduction will be for only $500.  But hey that is more than nothing, right?

7. Investment Expenses and Tax Preparation

For investment expenses and tax preparation expenses to count they must exceed 2% of Adjusted Gross Income (AGI).

Here are some types of deductible expenses for this category.

• Investment Fees
• Tax Preparation
• Safe-Deposit Box Rental
• Legal Costs but must involve business or income producing property

Example: If you and your spouse have a combined $100,000 AGI then the loss would have to be more than $2,000 in order to be allowable.  As a result, if you have $2,500 in un-reimbursed job expenses then your deduction will be for only $500.

The basic premise, if a taxpayer is married filing jointly, is that if their deductions total more than the standard deduction of $12,400 then it would be advantageous to claim the itemized deduction. Please note that this list does not cover every tax situation or category of itemized deductions however it is meant to be a guide for high-level tax planning.

What are some of your lingering questions about itemized deductions?