What Expenses Can be Itemized?

Itemizing expenses means you get to sort through a number of different categories and tally them up to come up with your total deduction number. Not everyone will have expenses in each category, but the most common expenses include:

• Mortgage interest.
• Charitable contributions.
• Property taxes.
• State and local income taxes.
• Medical expenses that exceed 7.5% of your adjusted gross income.
• Various miscellaneous expenses that exceed 2% of your income such as: union dues, tools and supplies needed for work, tax preparation fees, some legal fees, and many more.

Should You Itemize?

There’s no right or wrong answer and it really depends on your personal situation. To see if itemizing is beneficial you will have to crunch a few numbers, or if you utilize tax preparation software such as TurboTax it will let you know which method will save you the most money.

Generally speaking, if you had a year with a significant amount of out-of-pocket medical expenses, made large charitable contributions, had a casualty loss, or own a home with a sizeable mortgage and therefore interest payment, chances are you’ll want to look at itemizing.

One thing to note is there are some limits on itemizing deductions.  The amount of itemized deductions and personal exemptions you can take are normally phased out as your income rises. In 2010, however, those income limits have been repealed, and the recent tax relief act extends the repeal for two more years, through 2012.

2010 Standard Tax Deduction

• Married, Filing Jointly    $11,400
• Single   $5,700
• Married, Filing Separately          $5,700
• Head of Household       $8,400
• Blind or over 65 and married – add:        $1,100
• Blind or over 65 and single/head of household – add:     $1,400

Using the above numbers you can see where you need to be when itemizing to make that the more attractive option. As you can see, it isn’t all that difficult to go over the standard tax deduction amount if you are a relatively new homeowner. Even if just $800 of each mortgage payment goes towards mortgage interest you’re up to a $9,600 deduction, and if your annual property taxes are around $2,000 you’re already at $11,600, which is just above the standard tax deduction. That doesn’t even take into account any other itemized tax deductions you may have.

It pays to compare the two tax deduction methods as it could mean leaving money on the table. So, take a look at the expenses that might qualify and see if you’re missing out on any money.

The second option is to itemize your tax deductions such as mortgage interest, property taxes, charitable tax donations, state and local income taxes, and medical expenses (if they exceed 7.5% of your adjusted gross income). The categories I’ve just listed are the larger and more common of the expenses you might be able to deduct from your expenses.

The simplest way, to be honest, is to let your tax preparation software do it for you. All tax preparation packages will walk through all of your deductions and do the math for you, the decision of whether or not to itemize is a common one year in and year out.

Calculate Your Itemized Deduction

As a general rule of thumb, and there certainly many exceptions, if you don’t have a home mortgage then taking the standard deduction is likely the better option. However, if you want to be 100% sure, you will need to get a copy of the Form 1040 Schedule A and fill it out.

Schedule A is a two-page form (the second page is a Worksheet for line 7, which covers new motor vehicle taxes) that covers itemized deductions and it lists every possible tax deduction. It’s separated into 7 sections:

1. Medical and Dental Expenses

2. Taxes You Paid

3. Interest You Paid

4. Gifts to Charity

5. Casualty and Theft Losses

6. Job Expenses and Certain Miscellaneous Deductions

7. Other Miscellaneous Deductions

Once you’ve filled out this form, compare your total deductions against the amount you would receive as a standard deduction. You will want to choose the option that gives you a greater reduction in your taxes.

What if they are close?

If your itemized deduction is very close to what you could get as a standard deduction, you may want to pick a standard deduction. If you claim a standard deduction, you may be eligible to fill out the much simpler 1040EZ form. Also, you would not need to maintain a record of your itemized deductions because you never claimed them.

In the end, you will want to make the decision that makes the most financial sense to you and puts more of your money back into your pocket.