| Examples of allowable itemized deductions | | | | remaining $500 excess loss.) |
| There are a number of allowable deductions: | | | | Miscellaneous itemized deductions |
| Medical expenses, to the extent that the | | | | It is important to distinguish miscellaneous itemized |
| expenses exceed 7.5% of the taxpayer's AGI. | | | | deductions from other ormal itemized deductions. |
| (e.g., a taxpayer with an AGI of $20,000 and | | | | The reason for this is because miscellaneous |
| medical expenses of $5,000 would be eligible to | | | | itemized deductions are subject to a 2% floor. A |
| deduct $3500 of their medical expenses ( 20,000 | | | | taxpayer can only deduct the amount of |
| X .075 = 1500; 5000 - 1500 = 3500 ).) The 7.5% | | | | miscellaneous itemized deductions that exceed |
| floor means that most taxpayers are unable to | | | | 2% of their adjusted gross income. For example, |
| take advantage of the medical expense deduction. | | | | if a taxpayer has adjusted gross income of |
| Allowable medical expenses include: | | | | $50,000 with $4,000 in miscellaneous itemized |
| Payments to doctors, dentists, surgeons, | | | | deductions, the taxpayer can only deduct $3,000. |
| chiropractors, psychologists, counselors, physical | | | | 4,000 .02(50,000) = 3,000 |
| therapists, osteopaths, podiatrists, home health | | | | There are 12 deductions listed in 26 U.S.C. 67(b). |
| care nurses, cost of care for chronic cognitive | | | | These are NOT miscellaneous itemized deductions, |
| impairment | | | | and thus not subject to the 2% floor (although |
| Premiums for medical insurance (but not if paid by | | | | they may have their own rules). Any deduction |
| another, or with pre-tax money) | | | | not found in section 67(b) is a miscellaneous |
| Premiums for qualifying long-term-care insurance, | | | | itemized deduction. Examples include: |
| depending on the taxpayer's age | | | | Job-related clothing or equipment, such as |
| Payments for prescription drugs and insulin | | | | steel-toed boots, hardhats, uniforms (if they are |
| Payments for devices needed to treat or | | | | not suited for social wear: suits and tuxedoes are |
| compensate for a medical condition (crutches, | | | | not deductible, even if the taxpayer does not like |
| wheelchairs, prescription eyeglasses, hearing aids) | | | | to wear them, but nurses' and police uniforms |
| Mileage for travel to and from doctors and | | | | are), tools and equipment required for work |
| medical treatment | | | | Union dues |
| Necessary travel expenses | | | | Unreimbursed work-related expenses, such as |
| Non-deductible medical expenses include: | | | | travel or education (so long as the education does |
| Over-the-counter medications | | | | not qualify the taxpayer for a new line of work; |
| Health club memberships (to improve general | | | | law school, for example, is not deductible.) |
| health & fitness) | | | | Fees paid to tax preparers, or to purchase books |
| Cosmetic surgery (except to restore normal | | | | or software used to determine and calculate |
| appearance after an injury or to treat a genetic | | | | taxes owed |
| deformity) | | | | Subscriptions to newspapers or other periodicals |
| State and local taxes paid, including: | | | | directly relating to your job |
| Income taxes (or, alternatively, state and local | | | | Limitations |
| general sales taxes) | | | | If the taxpayer's adjusted gross income is above |
| Property taxes (assessed by reference to the | | | | a threshold (or "applicable amount"), then the total |
| value of the property)but not including: | | | | allowable itemized deductions is reduced by 1/3 of |
| Use taxes | | | | the lesser of |
| Excise taxes | | | | 3% of the excess of adjusted gross income over |
| Fines or penalties | | | | $166,800; or |
| Mortgage interest expense on debt incurred in | | | | 80% of the total itemized deductions otherwise |
| connection with up to two homes, subject to | | | | allowable |
| limits (up to $1,000,000 in purchase debt, or | | | | In 2009, the threshold adjusted gross income is |
| $100,000 in home equity loans)also, points paid to | | | | $166,800 ($83,400 if married filing separately). |
| discount the interest rate on up to two homes; | | | | So, for example, if your adjusted gross income is |
| points paid upon acquisition are immediately | | | | $300,000 and you have $20,000 in itemized |
| deductible, but points paid on a refinance must be | | | | deductions, first figure out 3% of the excess |
| amortized (deducted in equal parts over the | | | | above $166,800: |
| lifetime of the loan) | | | | .03(300,000 166,800) = $3596 |
| Investment interest, up to the amount of income | | | | Then figure out 80% of the total deductions |
| reported from investments (the balance is | | | | .80(20,000) = $16,000 |
| deferred until more investment income is | | | | Finally, determine which value is lesser, then take |
| declared) | | | | 1/3 of this value. In this instance, the lesser value |
| Charitable contributions to allowable recipients; this | | | | is $3596 so the taxpayer's total itemized |
| deduction is limited to either 30% or 50% of AGI, | | | | deductions shall be reduced by $3596 divided by |
| depending on the characterization of the recipient. | | | | 3, or $1199. This means out of the $20,000 |
| Donations can be made as money, or in the form | | | | itemized deductions claimed, only $18801 will be |
| of goods. The value of donated services cannot | | | | allowed. |
| be deducted as a contribution. Reasonable | | | | $20,000 $1199 = $18,801 |
| expenses necessary to provide donated services | | | | Even though the Internal Revenue Code sets the |
| can, however, be deducted (such as mileage, | | | | applicable amount at $100,000, that amount is |
| special uniforms, or meals). Non-cash donations | | | | subject to inflation. Therefore, you must double |
| valued at more than $500 require special | | | | check the Consumer Price Index for the applicable |
| substantiation on a separate form. Non-cash | | | | amount for the current year. |
| donations are deductible at the lesser of the | | | | In addition, this limitation on itemized deductions is |
| donor's cost or the current fair market value. | | | | applied after any other limitation. This means that |
| Eligible recipients for charitable contributions include: | | | | you first need to figure out the total allowable |
| Churches, synagogues, mosques, other houses of | | | | miscellaneous itemized deductions, etc., before |
| worship | | | | determining any limits on the total amount of |
| Federal, state, or local government entities | | | | deductions. |
| Fraternal or veterans' organizations | | | | Phaseout |
| Non-eligible recipients include: | | | | This limitation of itemized deductions is being |
| Individuals | | | | "phased out." In other words, the total reduction is |
| Political campaigns or political action committees | | | | itself subject to a reduction. For taxable years |
| (PACs) | | | | 2006 and 2007, the amount was reduced to 2/3 |
| Casualty and theft losses, to the extent that they | | | | of the limitation, and for taxable years 2008 and |
| exceed 10% of the taxpayer's AGI (in | | | | 2009, the amount was reduced to 1/3 of the |
| aggregate), and $100 (per event, $500 starting | | | | limitation. This "phase out" is complete on January |
| tax year 2009) | | | | 1, 2010. |
| Gambling losses, but only to the extent of | | | | Notes |
| gambling income (For example, a person who wins | | | | ^ |
| $1,000 in various gambling activities during the tax | | | | ^ For tax years 2004 through 2007. |
| year and loses $800 in other gambling activities | | | | ^ 26 U.S.C. 67 |
| can deduct the $800 in losses, resulting in net | | | | ^ a b c Id. |
| gambling income of $200. By contrast, a person | | | | ^ Id. 67(b) |
| who wins $3,000 in various gambling activities | | | | ^ Chirelstein, Marvin A., Federal Income Taxation |
| during the year and loses $3,500 in other gambling | | | | 198 (Foundation Press, 10th Ed., 2005) |
| activities in that year can deduct only $3,000 of | | | | ^ Id. 68 |
| the losses against the $3,000 in income, resulting | | | | ^ Id. 68(b) |
| in a break-even gambling activity for tax purposes | | | | ^ Id. 68(d) |
| for that year -- with no deduction for the | | | | ^ Id. |