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Maximizing your itemized tax deductions

Tax-deductions

You have a mortgage. That home's property taxes are waaaay too big. (Note to self: Protest the appraisal.) And you were really generous.

All those expenses probably mean that you itemize instead of taking the standard deduction when you file your taxes.

Yes, it's more work, but if you take full advantage of all Schedule A has to offer, it can really pay off.

Schedule A (Form 1040)  Schedule A 2016_Header

Here's a closer look at what you can claim where when you itemize.

Medical and Dental Expenses  Schedule A 2016_Medical-Dental Expenses

Being sick sucks. Having to pay a lot of out-of-pocket medical expenses is a pain, too. But if you have a lot of medical and dental costs, you might be able to put them to tax deduction use in this first section of Schedule A. The key here is to make sure the expenses are OK by the Internal Revenue Service, aka qualified medical expenditures. IRS Publication 502 has a full list.

Then you have to have enough medical costs to exceed 10 percent of your adjusted gross income (AGI). That percentage threshold is if you're younger than 65. Older taxpayers get to use the 7.5 percent threshold for their 2016 returns, but starting in 2017 it's 10 percent for all itemizers regardless of age.

Since you can only count the amount of medical costs that are more than your age-related threshold, you need to make sure you don't overlook any allowable doctor etc. costs. The good news is that there are many medical expenses that can make you feel better at tax time.

This includes things like medical weight loss efforts, smoking cessation programs and even some structural changes to your home.

Taxes You Paid   Schedule A 2016_Taxes You Paid

Residents of 43 states and the District of Columbia pay state income taxes. If you're one of them, you can deduct those taxes here. Don't forget your local income taxes; yes, some cities/counties collect them, too, and they're also deductible as an itemized expense.

If, however, you live in one of the seven states without an income tax — that's Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming — or your state income tax is low, you'll want to deduct instead your state and local sales taxes. The IRS provides average amounts for each state so you don't have to hang onto all those receipts.

But you will need the sales document for any made a major taxable purchase, such as a car or boat, during the year. You can add that general sales tax amount to the total from the IRS table that you claim.

Remember, it's an either/or choice. You can't mix and match sales and income tax deductions. You must choose just one to claim on this section of your Schedule A.

Homeowners also get to write off their annual property taxes here. And if you have a second home or any other personal-use, not rental, properties, those real estate taxes are claimed here.

Some places levy personal property taxes, too, typically on autos and other vehicles. Deduct that amount here.

Interest You Paid    Schedule A 2016_Interest You Paid

Schedule A has two lines for claiming mortgage interest paid. The first is for the amount reported on your annual Form 1098 or an accepted IRS substitute that you (with a copy to the IRS) get early each year from your lender. That goes on line 10. If you pay mortgage interest that's not reported on a Form 1098, it goes on line 11.

The interest you can claim here is from your primary residence's loan and on a second home loan. If you own more than two houses, you're out of tax deduction luck. You only get to write off interest on your main and one second home. Don't be confused here by the property taxes mentioned in the previous section. Yes, you get to deduct all property taxes on Schedule A for all your personal real estate, but mortgage interest for only two homes.

And note the margin note on the form that "your mortgage interest deduction may be limited." This comes into play when the total of your home and second home mortgages are more than $1 million. It also refers to home equity loans, the interest on which also is tax deductible. When you or your spouse if you file jointly got a home equity loan or home equity line of credit (HELOC) and used the money for reasons not related to your home (e.g., to pay a child's college costs or pay off credit card bills), these loans can't be over $100,000.

Some homeowners also get to deduct private mortgage insurance (PMI) premiums as interest on this section of Schedule A. PMI policies typically are required by lenders when a home buyer can't make at least a 20 percent down payment on their home. This itemized deduction first appeared in 2006 and was renewed periodically as part of tax extenders packages over the years. However, it was not extended the last time and unless Congress acts, the 2016 tax year could be the last time it's available as an itemized deduction.

A final home-related expense can be an itemized deduction here if you paid points. These are added loan application payments — each is 1 percent of your loan amount — to get a lower mortgage rate.

Investment interest, which is the amount you paid on money you borrowed to buy stocks, bonds and other equities also is deductible. You enter it on line 14 of your Schedule A.

Gifts to Charity    Schedule A 2016_Gifts to Charity

Most people don't donate to charity for tax reasons, but if you can claim a deduction for your charitable gift, then by all means do so. This deduction includes cash, check and credit card donations, as well as gifts of household goods and clothing.

Don't forget about other, atypical types of donations, such as appreciated stocks. Volunteering doesn't count, but you can count the value of out-of-pocket expenses you incur while giving of your time, as well as the miles you drive your own car for charitable purposes.

No matter how you give to your favorite nonprofit, get a receipt.

Casualty and Theft Losses    Schedule A 2016_Casualty and Theft Losses

If you suffered damages from a major disaster, either a natural one or an unexpected accident, or you are the victim of a crime, your recovery costs could be tax deductible. You enter those costs in this area of Schedule A. You also might want to check out the ol' blog's special disaster resources page.

Job Expenses and Certain Miscellaneous Deductions    Schedule A 2016_Job Expenses-Miscellaneous Deductions

Sometimes you have to cover some costs in connection with your job. The expenses might provide a tax deduction here. This includes such things as buying work-required uniforms and keeping them presentable or memberships in professional organizations. You also can claim money spent searching for a new job as an itemized expense here.

If you got professional help to fill out Schedule A and the rest of your taxes, you can deduct your tax preparation fees, as well as any fees you paid to e-file. You also can count the tax software you bought to do your taxes yourself.

Other miscellaneous expenses you can include in this section are those that paid to produce income. This includes certain legal and accounting fees, some investment expenses, even the annual charge for a safe deposit box to hold your securities.

There's one problem here, though. All these miscellaneous amounts must be more than 2 percent of your AGI before they count as itemized deductions.

Other Miscellaneous Deductions    Schedule A 2016_Other Miscellaneous Deductions

Yes, this is a different category of deductible miscellaneous expenses. These are not subject to the 2 percent limitation.

The most commonly claimed expenses here — or at least the most popularly referred to — is gambling losses to offset your winnings reported on line 21 of your Form 1040. You also can enter here casualty and theft losses of income-producing property, losses from other activities from box 2 of a Schedule K-1, certain unrecovered investment in a pension and impairment-related work expenses of a disabled person.

Yeah, they're rather arcane. You can find more details in IRS Publication 529.

Total Itemized Deductions     Schedule A 2016_Total Itemized Deductions-Pease limits

In this last section, you total up all your allowable Schedule A deductions. But if you make more than a certain amount, then some of your itemized deductions could be reduced.

This is known as the Pease limitation, one of several laws named after their advocates. The late Rep. Don Pease (D-Ohio) championed the deduction limits on higher-income taxpayers.

Specific income triggers for each filing status are adjusted each year for inflation. When you hit the thresholds, your Schedule A amounts for home mortgage interest, state and local tax claims, charitable gifts and miscellaneous deductions is reduced by either 3 percent of your adjusted gross income in excess of your threshold amount or 80 percent of the amount of itemized deductions you otherwise could claim for the tax year.

Yeah, this is one of those things you let your tax pro or tax prep software figure for you!

Picking your deduction method: That's it. You made it through Schedule A (and today's Daily Tax Tip!) and claimed a lot of expenses that make itemizing worth more than the standard deduction! And while folks who itemize tend to do so year after year, you're not locked into the method.

You make the decision each year when you file, depending on your tax circumstances that year.

Look at both ways and then use whichever deduction amount works better for you each tax year. And if/when that means you itemize, be sure to maximize those write-offs.

You also might find these items of interest:

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Comments

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Kay Bell

Thanks Jamie! Hope your filing is done and successful!

Jamie Smith

Great post Kay! I'm sure your readers will appreciate the level of detail you gave to these deductions.

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