The Complete Guide to Itemized Deductions

Itemized deductions are one of the least used tax incentives.  With the standard deduction being a whooping $12,200 for individuals and twice that amount for married couples, who would blame you.

But in those years where you make big purchases or have huge medical expenses, it could very well be worth your time to itemize.  And to do that you need to know what deductions are out there.

Here are all the itemized deductions you could claim:

Each one of these have varying income limits and limits on the amount you can deduct.  To take these deductions you need to use Schedule A.  Let's take a closer look at these deductions below.

Mortgage Interest

If you are paying for a mortgage, you are no doubt paying interest on that mortgage.  This interest is deductible on your tax return.  

The deduction applies to loans for first and second homes and can be in the form of a 1^st/2^nd mortgage, home equity loans, and refinanced mortgages.  Points that you pay are deductible as well.

In most cases, your home mortgage interest will be fully deductible. However, there are limits depending on when the mortgage was taken out.  

For loans acquired on or before December 15, 2017, the interest is deductible on principles up to $1 million ($500,000 if married filing separately).  If the loans were taken out after that date, the principle is limited to $750,000 ($375,000 if filing separately).

For interest paid on seller-financed homes, you will need the person's name, SSN, and address (if you did not get a Form 1098 from them).

Mortgage Insurance Premiums

This was extended for the 2019 tax year and just recently extended for the 2020 tax year as well.  

For those of you who have had to pay private mortgage insurance (PMI) or mortgage insurance issued by the Department of Veteran Affairs, Rural Housing, or Federal Housing Administration, you’ll be glad to hear that you can deduct this from your income.

This applies to any first or second home purchased with a loan after 2006.  If you are splitting payments with another person, only write in your portion.  Funding fees and guarantee fees are also fully deductible.

There is a limit on the amount you can deduct.  If your AGI is less than $50,000 (filing separately) or $100,000 (filing jointly), it is fully deductible.  

However, over this amount it starts to phase out until it reaches $54,500 and $109,000 for separate and joint filers, respectively.  See table below.

*Use Mortgage Insurance Premiums Deduction Worksheet to figure out how much you can deduct.

Investment Interest

If you borrowed money for an investment, you can write off the investment interest as long as it is not from a ‘passive activity’.  

Money used to buy stocks, real estate, or a business are some examples that could be written off.

Receiving the money in cash excludes your from this deduction.  However, if the money is deposited into an account before it is used, the interest for the months that it was in the bank account is deductible.

There are limits on how much you can deduct.  Depending on the investment type, it can be limited to how much income you received from the investment.  Interest that you cannot deduct this year can be carried over to next year.

See IRS Publication 550 for more details.

Charitable Donations

Contributions made to qualified organizations are deductible on your tax return.  You may want to check with the organization to be sure that it qualifies.

The IRS also has a website (IRS.gov/TEOS) you can use to see if your organization is eligible and that your contributions are deductible.

Contributions are not restricted to just cash.  It can be property as well as out of pocket expenses you paid while volunteering such as buying candy to sell or ingredients to make cupcakes for a bake sale, etc.

Any amount paid back to you cannot be written off even if it is paid back as a benefit.  For instance, if you donate $50 to a charity and in return receive a $10 T-shirt, you would only be able to deduct $40.  

Also, for any cash contribution over $250 you will need to get a statement from the organization for your records.

If you donate property, such as clothes, household items, or even a car that is more than $500 in value, you will need to fill out Form 8283 and may be required to get an appraisal.

Deduction Limits

There are also limits on the amount you can deduct. Limits are sometimes determined by the kind of organization you donate to: church vs. a private non-operating foundation.  

The type of property you give can also determine these limits. For example, the deduction for your donation of a car may be limited to 20% or 30% of your AGI. 

Deductions are generally limited to no more than 60% of your AGI. However, contributions for disaster relief efforts can be up to 100% of your AGI.

Charity Miles

Driving to and from charitable or volunteer events requires you to spend money on gas, tolls, and possibly parking.  All of which, you can deduct from your taxable income.

For gas, you can either choose to use the standard deduction rate of 14 cents per mile or calculate the actual cost for you.  The choice is yours.  If I were you, for tax purposes, I would keep detailed notes for every volunteer activity I plan to write off.

Medical and Dental Expenses:

Unreimbursed medical and dental expenses can be deducted if the amount you paid out of pocket exceeds 7.5% of your adjusted gross income (AGI).  

You may deduct insurance premiums, long-term care insurance premiums, medical exams, prescriptions, weight loss programs (to help combat an illness), and so much more.

These medical and dental expenses can be for you, your spouse, anyone whom you can claim as a dependent (child, relative, friend), and even your child or relative whom you cannot claim as a dependent on your return but whom you have supported, paying at least ½ of expenses.

If you claim self-employed deductions for insurance on Schedule 1, you must reduce the premiums you claim on schedule A by that amount.

There are limits for how much you can deduct for long-term care insurance that is based on your age.

• Age 40 or under—$420.
• Age 41 to 50—$790.
• Age 51 to 60—$1,580.
• Age 61 to 70—$4,220.
• Age 71 or over—$5,270.

Medical Miles

Medical miles are deductible for a standard mileage rate of 17 cents per mile for the 2020 tax year and 20 cents per mile for the 2019 tax year.  There is always the option to do your own calculations but adequate records must be kept.

State and Local Taxes (SALT)

Under the Tax Cut and Jobs Act of 2017, the amount of tax that is deductible is limited to $10,000 (or $5,000 if filing separately).   Any state or local tax credit you receive will reduce the amount that you can deduct. 

You may choose to deduct state and local sales taxes instead of the taxes to your income.  This is an option for those states that do not have income tax.  Be aware though that you cannot choose both.

Income Tax

If you go the income tax route, you may deduct taxes withheld during the tax year, taxes you paid that year (including estimates), and mandatory taxes paid to disability funds, unemployment funds, and family leave programs.  

You don’t need to take into account your expected refund after filing taxes nor any refunds received the year before.

Sales Tax

If you choose to go the sales tax route, you can choose to do your own calculations of actual expenses or use the optional sales tax tables provided. 

For calculating your actual expenses, you may deduct the sales tax if it is the same as the general sales tax. You can deduct food, clothing, and medical supplies at the general sales rate even if the actual tax rate was less.  

Sales tax paid on cars are limited to the general sales tax rate if the taxes you actually paid were higher. Keep your receipts.

For items purchased for your business, do not deduct the taxes here. Also, if you received a refund on your general sales taxes for last year, then you must reduce your actual tax amount.

State and Local Real Estate Taxes 

These property taxes are deductible from your income.  If you received a refund for these taxes that will reduce the amount you can deduct.

State and Local Personal Property Taxes 

If you had to pay taxes based on the value of your property every year, then these would be deductible. For example, if you have to pay registration fees for your car every year, you may deduct it.

Other Taxes

Taxes paid to a foreign country can be written off here although you may want to check and see if taking the credit for this will be more beneficial.

Generations skipping tax is a tax resulting from the inheritance of money or property by grandchildren from their grandparents.  The grandparents essentially skip over their children.  This tax is deductible on Schedule A as well.

Car Interest and Fees

If you elect to deduct state and local sales tax instead of income tax, you may deduct the sales tax you paid in purchasing your car.

Casualty and Theft Losses

If you live or have property in a federally declared disaster zone, you will be able to deduct personal loss on your tax returns.  These losses also include theft and if your bank goes bankrupt and you lose the money you had invested with them.  

The losses must be more than $100 and more than 10% of your AGI before you can begin taking the deduction.

Some of the casualty losses include fires, car accidents, floods, vandalism, earthquakes, and storms.  However, normal wear and tear, damage done by pets, and car accidents resulting from your negligence are not deductible.

Limits are determined by that $100 (*disaster area losses must be reduced by $500) and 10% rule.  So with your given loss amount you must subtract out $100 and 10% of your AGI to arrive at the amount you can deduct.

To claim this deduction you need to fill out Form 4684, which will help you determine the amount of your loss.

Increased Standard Deduction: 

If you do not itemize, you can claim an increased standard deduction for your losses. To calculate simply combine your “Net Qualified Disaster Loss” with your standard deduction.

An exception to the federal disaster rule is if you have casualty gains for the tax year.  In that instance, you can reduce your gains by your losses (not resulting from a federal disaster).  But any left over gains must be used to reduce losses in a federal disaster zone.

Other Itemized Deductions

• Gambling Losses: Can include non-winning raffle, bingo, and lottery tickets. Deduction limited to the amount of gambling winnings.
• Casualty and Theft Losses on Income-producing Property
• Federal Estate Tax on Income
• Deduction for Amortized Bond Premium
• Ordinary Loss from a Contingent/Inflation Protected Debt Instrument
• Repayment of a Claim of Right 
• Certain Unrecovered Investments in a Pension
• Impairment Related Work Expenses for a Disabled Person

All in All

The decision of whether to do itemized deductions or to take the standard deduction is yours.  Some years it may be more worth it to take the standard deduction, others not.  You may want to take some time to run the calculations and see which one would give you a bigger return.