Itemizing vs Standard Deduction

Larry Villano, Publisher of Loopholelewy.com

Except for someone who can be claimed as a dependent on another person's return, every taxpayer is entitled to claim the standard deduction.

Some taxpayers are not eligible for the standard deduction, such as nonresident aliens, dual-status aliens and individuals who file returns for periods of less than 12 months due to a change in accounting periods.

There's a basic standard deduction that applies to all taxpayers. Taxpayers 65 or older or blind or both 65 and blind, get a higher standard deduction. The higher deduction is figured by adding an additional amount for age and an additional amount for blindness to the basic standard deduction.

Itemized deductions include the following:

  • Medical expenses: Effective 2013, for taxpayers under 65 years of age, medical expenses must exceed 10% of AGI (adjusted gross income). For taxpayers 65 or older, the 7 1/2% floor still applies.
  • Taxes: This includes real estate taxes, either state income taxes or sales taxes, whichever is greater, and personal property taxes (i.e. the property tax portion of a vehicle's registration fee if you live in a state that assesses a property tax on vehicles).
  • Interest: Home mortgage Interest, points, mortgage insurance premiums, and investment interest (Form 4952).
  • Gifts: Charitable contributions, cash and noncash.
  • Casualty and theft losses
  • Job Expense and Certain Miscellaneous Deductions (subject to the 2% of AGI floor) including:
    • Unreimbursed employee business expenses, tax preparation fees, other expenses, such as safe deposit box fees. The total of these expenses must exceed 2% of AGI to get a tax benefit.
  • Other Miscellaneous Deductions (not subject to the 2% of AGI floor):
    • For example, gambling losses.

Deciding Whether to Itemize or Claim the Standard Deduction

Simply add up your itemized deductions and compare the total to your standard deduction. Claim the higher amount. You cannot claim both!

TIP:
Although medical expenses must exceed 10% of AGI (7 1/2% if 65 or over) for federal tax purposes, Arizona does not limit the amount you may deduct for medical expenses. An adjustment is made on Arizona Schedule A to take into account 100% of medical expenses entered on the federal Schedule A.

For example, if you're under 65 and your AGI is $50,000 and your medical expenses are $6,000, you may only deduct $1,000 ($6,000 minus 10% x $50,00) on Schedule A of your federal return. However, Arizona does not limit your medical expense deduction, and therefore, you may deduct the entire $6,000. Check your state's rules for deducting medical expenses.

Married Filing Separately

When a married couple files separate returns and one spouse itemizes deductions, the other spouse cannot claim the standard deduction and therefore must itemize to claim their allowable deductions.

Higher Income Taxpayers

For higher income taxpayers there is an overall limit on itemized deductions. Itemized deductions are reduced by the lesser of 3% of the amount that adjusted gross income exceeds the applicable threshold amount or 80% of itemized deduction subject to the phaseout. In other words, you cannot lose more than 80% of itemized deductions subject to the phaseout. Investment interest is not subject to the phaseout.

Items Not Subject to Limitation

You're subject to the limit on certain itemized deductions if your adjusted gross income (AGI) is more than $300,000 if married filing jointly or qualifying widow(er), $275,000 if head of household, $250,000 if single, or $150,000 if married filing separately. Your AGI is the amount on Form 1040, line 38.

The following Schedule A (Form 1040) deductions are not subject to the overall limit on itemized deductions. However, they are still subject to other applicable limits:

  • Medical and dental expenses
  • Investment interest expense
  • Casualty and theft losses of personal use property
  • Casualty and theft losses of income-producing property
  • Gambling losses

How Do You Figure the Limit?

If your itemized deductions are subject to the overall limit, the total of all your itemized deductions is reduced by the smaller of:

  • 80% of your itemized deductions that are affected by the limit, or
  • 3% of the amount by which your AGI exceeds $300,000 if married filing jointly or qualifying widow(er), $275,000 if head of household, $250,000 if single, or $150,000 if married filing separately.

Before you figure the overall limit on itemized deductions, you must first complete Schedule A (Form 1040), lines 1 through 28, including any related forms (such as Form 2106, Form 4684, etc.).

The overall limit on itemized deductions is figured after you have applied any other limit on the allowance of any itemized deduction. These other limits include charitable contribution limits, the limit on certain meal and entertainment expenses, and the 2%-of-adjusted-gross-income limit on certain miscellaneous deductions.

More information on the standard deduction.