What is the Itemized Deduction?

Explanation

Individual taxpayers claim itemized deductions to lower their tax burden. These are tax-deductible expenditures that can be reduced from AGI to lower the tax burden of an individual taxpayersTaxpayersA taxpayer is a person or a corporation who has to pay tax to the government based on their income, and in the technical sense, they are liable for, or subject to or obligated to pay tax to the government based on the country’s tax laws.read more. The tax bracket of an individual taxpayer and their filing status will ultimately determine the amount of concession they might receive on the tax burden. These options are only available to taxpayers eligible to receive standard deductions.

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Types

  • Taxes paid by the Individual Taxpayer (Sales TaxesSales TaxesThe government levies sales tax on the consumption of various goods and services as the percentage added to the product and services from which the government earns revenue and does the company’s welfare. In the United States, 38 different states have different taxes, from Alaska (1.76%) to Tennessee (9.45%).read more, Property Taxes, Family Leave Taxes, Unemployment Taxes, etc.)- Prepaid taxes are not eligible for the deduction. Still, state and local taxes paid during the year can be applied for the deduction.Interest paid by Individual Taxpayer- These include home equity loan interest or mortgage interest paid expenses.Unreimbursed Medical as well as Dental Expenses- include doctors’ fees, prescription charges, insurance premiums, non-cosmetic surgery expenses, ambulance or transportation costs, etc. The medical and dental expenses exceed ten percent of the taxpayer’s adjusted gross income and 7.5 percent if the taxpayer is above 65 years of age.Charitable Contributions- Deductions can be claimed up to 30 percent of tax payer’s adjusted gross income for property-related donations and 50 percent in cases of cash donations.Investment Interest- Only a certain amount earned from investments shall qualify for deductions.Casualty as well as theft losses (if any);Miscellaneous Itemized Deductions- Such expenses can be deducted if all of these exceed 2 percent of an individual taxpayer’s adjusted gross incomeAdjusted Gross IncomeAdjusted Gross Income (AGI) is calculated from the gross income. It represents the net income earned by an individual in a year, including wages, capital gains, and retirement distributions after deducting above-the-line deductions. It determines an individual’s taxable income by determining deductions or credits a person is eligible to receive.read more.

List of Itemized Deduction

  • Investment interest expensesHome mortgage interestsCharitable contributionMedical expensesDental expensesThe property, state and local IT (income tax)Job-related expenses and such other itemsInterest and taxes already paid by the taxpayerMiscellaneous deductions.

How to Claim?

An individual taxpayer seeking to claim itemized deductions can begin by filling out a Schedule A form. This is a separate form; it can be downloaded along with a 1040 form from the IRS website. Schedule A form will mention all the steps an individual taxpayer must follow to calculate deductions. The final amount calculated from the Schedule A form should then be filled up in the 1040 form in the deductions segment.

Itemized Deductions vs. Standard Deduction

Both itemizing and standard deductions help reduce the tax burden of an individual taxpayer. However, itemized deductions must not be confused with the standard deduction.

  • An individual taxpayer must report each and every qualified deduction in an itemized deduction. On the other hand, in the case of the standard deduction, an individual taxpayer will only be required to subtract a flat amount.Itemized deductions can be availed after compulsory completion of Schedule A and other forms. In contrast, standard deductions do not require an individual taxpayer to complete all these formalities.

Advantages

  • It enables individual taxpayers to claim more eligible expenses- This is probably the best of all the benefits of opting for itemized deductions. It enables the individual taxpayers to claim a range of expenses like dental expenses, charitable contributions, medical expenses, investment interestInvestment InterestInterest in investments is the periodic receipt of inflows on financial instruments which may be in the nature of the bond, government securities, or bank account. It is income earned from the specified form of assets which may be liquid in nature. read more expenses, property, state and local IT (income tax), job-related expenses, home mortgage interests, casualty as well as theft losses, and such other items, interest, and taxes already paid by the taxpayer and Miscellaneous other deductions.Individual taxpayers can even save a lot of money- It enables them to itemize more deductions, which means they can easily save a lot of money as they will be able to reduce their tax implications and apply for a higher tax refund.

Disadvantages

  • It takes a lot of documenting and hard work- These deductions can be tiresome for taxpayers since it requires a lot of documenting and effort.Time-consuming-  These deductions can also be time-consuming because a lot of time goes into documenting processes.Restrictions on the individual taxpayer- The presence of unnecessary restrictions also discourages the individual taxpayers from availing of this option.

Conclusion

  • Types of itemized deductions are Investment interest expenses, Home mortgage interests, Charitable contributions, Medical expenses, Dental expenses, property, state and local IT (income tax), Job-related expenses, and such other items, Interest and taxes already paid by the taxpayer and Miscellaneous deductions.Itemizing deductions should not be confused with standard deductions, as both are contrasting. These deductions have advantages and disadvantages, and individual taxpayers must consider them before opting for the same.It enables individual taxpayers to claim various expenses and save much money in taxes. On the other hand, this can be time-consuming since it requires a lot of documentation and effort, and there are even restrictions on a few itemized deductions.

This has been a guide to What the Itemized Deduction & its Definition. Here we discuss the types of itemized deductions, examples, and their differences from Standard Deductions. You can learn more about it from the following articles –

  • Mortgage Interest DeductionAbove the Line DeductionsTax ShieldAfter-Tax Income CalculationsBackup Withholding