What is an Itemized Tax Deduction?
An itemized tax deduction is the alternative to taking the standard tax deduction. An itemized deduction counts all of your tax deductions in order to lower your taxable income. It requires more work than claiming the standard deduction, but it can also pay off if your itemized tax deduction is greater than the standard deduction.
Taxpayers are allowed to take personal tax deductions in the following categories:
- Medical Expenses
- Mortgage Interest on up to two homes
- State and Local Taxes
- Sale Tax
- Property Taxes
- Charitable Donations
If you want to claim an itemized tax deduction then you need to keep records of all the items you want to deduct. If the IRS audits you, you need to be able to prove that the deductions you took were legitimate. You should hold onto receipts or other paperwork on tax deductible items for at least seven years.
Itemized Tax Deduction Scenario
Juliet is preparing her taxes and is debating if she should claim the standard deduction or if she should itemize. In the past she has claimed the standard deduction, but over the last year she has had more tax deductible expenses.
She purchased a home in the last year and has been paying a mortgage and property taxes. Juliet also had some unexpected medical expenses when she had her appendix removed.
Because she had the bigger expenses, she is going to do an itemized deduction, which will lower the amount she has to pay in taxes.
When Juliet files her taxes she will fill out the Schedule A form. The Schedule A form lists all of her itemized deductions. The total deductions from the Schedule A form are then entered on a 1040. The deductions are subtracted from Juliet’s income to determine her taxable income.
Juliet will submit her completed taxes to the IRS through the eFile system, just like she has in previous years. Now all she has to do is wait for that tax return!