Maximizing your itemized tax deductions
Tuesday, April 12, 2022
You have a mortgage that, even after refinancing at a lower rate, racks up a substantial interest bill. That home's property taxes were pretty hefty, too. (Note to self: Next appraisal period, protest the assessment.)
Don't even start with your state — and county and city — income taxes. But at least your good salary meant you were able to be really generous.
All those factors could mean you're in the tax-filing minority that finds itemizing expenses will get you a larger deduction than the standard amount.
Here are some tips to help you get the most out of your Form 1040 Schedule A (Form 1040) entries.
Schedule A (Form 1040)
Medical and 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.
The goal here is to account for enough medical costs that exceed 7.5 percent of your adjusted gross income (AGI). That means, for example, if your AGI is $100,000, you must have medical expenses that total more than $7,500. And then only the amount over that, counts. Total medical expenses of $8,000 in this example mean a Schedule A claim of $500.
If you're close or just slightly over your percentage threshold, make sure you don't miss any allowable medical costs that could help increase your deduction here.
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.
Tax law changes prompted by the COVID-19 pandemic also offer some new deductible medical costs.
Taxes You Paid
Residents of 42 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.
But now there is a limit.
These non-federal taxes used to be a major Schedule A write-off for millions of taxpayers, particularly in high income tax states. The Tax Cuts and Jobs Act of 2017, popularly known as TCJA and/or the Republicans' tax reform law in effect through 2025, placed a limit on the amount you can now deduct on your federal return. It's capped at $10,000.
That 10 grand includes the state and local sales tax deduction you can claim if you live in one of the eight states without an income tax — that's Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — or your state income tax is low. The IRS provides average amounts for each state in the Schedule A instructions 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. 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.
But once again, your property tax total counts toward the $10,000 state and local taxes (SALT) limit.
Interest You Paid
Schedule A has two lines for claiming home 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. The other is for interest not reported on an official form or substitute.
You can claim interest on your primary residence's loan, as well as a second residence as long as the mortgage satisfies the same requirements as the main home.
Under the TCJA, interest on a home equity loan or home equity line of credit (HELOC) also is deductible, but only where the additional borrowed funds are used to, in the revised tax code's words, to "buy, build, or substantially improve the taxpayer's home that secures the loan." Interest isn't deductible when the money borrowed against home equity is used for things such as paying college costs or bucket-list vacations.
Note, too, the margin note on the form that "your mortgage interest deduction may be limited." This refers to the total of your home and second home mortgages, based on when the loans were obtained. For those taken out after Dec. 15, 2017, interest is limited to loans up to $375,000 for single filers and up to $750,000 worth of qualified loans for married couples filing jointly.
If your home loans were obtained before 12/15/2017, the prior tax law's $1 million limit ($500,000 for married filing separately filers) still applies.
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 has been renewed periodically as part of tax extenders packages over the years. It's still available for the 2021 tax year.
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 in this section of Schedule A.
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 tax break used to be available only for itemizers. However, another coronavirus tax law change offers individuals who claim the standard deduction a chance to deduct up to $300 in cash donations if they're single taxpayers, or $600 for a married couple filing jointly, directly on Form 1040 or Form 1040-SR (line 12b on both). For your information, under tax law, cash gifts aren't limited to strictly actual dollar donations; they include gifts made by check, credit and debit cards, and donations by text.
But if you give more than $300/$600, or your donations included gifts such donations of household goods and clothing, other property, or appreciated stock, you'll have to itemize. You'll enter all your gifts to IRS-authorized nonprofits in the Gifts to Charity section.
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.
Note, too, the annotation here about getting anything in connection with your gift. This ranges from the iconic tote bag for a gift to your PBS station to the value of the meal at the gala dinner for a local scholarship fund. You generally can only deduct the amount that is more than the value of the benefit.
And no matter how much or how you give to your favorite charity, it's always a good idea to get a receipt.
Casualty and Theft losses
Another provision in the 2017 tax reform bill changed what can be counted in this section of Schedule A.
While the title remains Casualty and Theft Losses, they now must be in connection with major natural disasters to be tax deductible. You enter these costs that are attributable to federally declared disaster in this section.
My earlier post, Considerations in making a major disaster tax claim, has more on itemized disaster deductions. So does IRS Publication 547 and Form 4684 which you'll use to make the claims. You also might want to check out the ol' blog's special disaster resources pages.
Other Itemized Deductions
The Tax Cuts and Jobs Act also eliminated, at least through 2025, the option to claim a variety of miscellaneous expenses that were to a 2 percent of AGI limitation. It kept, however, this Schedule A section.
There are eight other itemized deductions that can be claimed here. They are, for the most part, relatively uncommon and sometimes arcane, including —
- Casualty and theft losses of income-producing property from Form 4684 or Form 4797,
- Federal estate tax on income in respect of a decedent,
- A deduction for amortizable bond premium,
- An ordinary loss attributable to a contingent payment debt instrument or an inflation-indexed debt instrument,
- Deduction for repayment of amounts under a claim of right if over $3,000 (see IRS Publication 525),
- Certain unrecovered investment in a pension, and
- Impairment-related work expenses of a disabled person.
You also can claim here any gambling losses to offset your gambling winnings that you reported on Form 1040 Schedule 1.
Total Itemized Deductions
You made it! In this last section, you total up all your allowable Schedule A deductions. It goes on line 17, and also is entered on line 12 of your Form 1040.
In most cases, you'll use your itemized total when it's more than your standard deduction amount. In some cases, however, you might want to itemize even if the total is less. This could happen, for example, if itemizing on your federal return provides a benefit on your state taxes.
Whatever the reason for choosing the smaller itemized amount, let the IRS know that you're making the decision knowingly by checking the box on line 18.
Yes, itemizing deductions is more work, but if you take full advantage of all that Schedule A has to offer, it can really pay off.
And if these suggestions make you want to give itemizing a shot, but you need more time to dig up the supporting documents, no worries. Just file for an extension, then take your time filling out your Schedule A.
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