Itemized Deductions

Learn how you can be aware of the major categories of itemized expenses a taxpayer may report and deduct on their personal return.  An acute understanding of what you can legally deduct will help you keep your tax bill as low as legally possible as well as avoid an unnecessary audit.

Itemized expenses as listed on one’s personal income tax return allow a taxpayer the option of further reducing their taxable income.  Taxpayers who do not itemize are allowed to claim a standard deduction, which is determined based upon their filing status.  Taxpayers are allowed to claim either their standard deduction or the total of their itemized expenses.  Accordingly, you should use the higher of these two amounts so that your taxable income is reduced accordingly/as much as possible.  Congress has done much to limit what can be claimed as an itemized expense to several of the below major types and categories:

Medical Expenses

Medical expenses you pay personally for premiums, out of pocket expenses to physicians, dentists, orthodontists, optometrists, eyeglasses and any medical premiums you personally pay (unless you are already receiving a tax benefit such as a Section 125/cafeteria plan at work) are expenses that can be itemized.  Unfortunately however, you only receive credit on the total medical expenses in excess of such a high threshold of AGI (Adjusted Gross Income).  Thus generally speaking, absent a horrific year in terms of medical expenses, it is difficult for most taxpayers to receive any benefit for this deduction.

Real Estate Taxes

Real estate taxes homeowners paid on the assessed value of both your primary and secondary homes are allowable itemized expenses.  These amounts are typically found, if your mortgage has an escrow account, on your year-end mortgage interest statement.  If you do not have an escrow account, you will pay these monies directly to the taxing authority, typically a county or municipality.  Taxpayers are not allowed to deduct the amount of reserves placed in escrow accounts. Only property taxes paid directly to the taxing authority from the account is deductible.  Frequently, if you pay other tax registration taxes/stamp taxes on the purchase of a primary or secondary residence; these may be deducted as well.

Ad Valorem/Personal Property Taxes

Ad valorem /personal property taxes are those taxes paid on the locally assessed (typically the county or parish) of your primary residence.  These would include the taxes paid on automobiles, motorcycles, boats and trailers.

Deducting Mortgage Interest

Mortgage interest that you pay on a primary or secondary home is also a deductible itemized expense.  To this total you are able to also add any prepaid interest (origination cost) you similarly pay.  These amounts are communicated to the borrower by the lender in a year-end mortgage interest statement.  Homeowners may also deduct any interest they pay on the closing statement provided they are not already reflected on the year end statement provided by the lender.  If a homeowner has an equity line of credit on their home, interest paid on borrowing from the line is also deductible, but deductions are limited to the aggregate value of all loans relative to the original purchase price (not appraised value) of the home.

Deducting Charitable Contributions

Tax law has long encouraged, by their allowance as a deductible itemized expense, individuals to support and give both cash and personal property to charities.  To qualify as a charitable deduction, an expenditure or property donation has to be to an organization legally recognized as a charitable organization (i.e. the Red Cross, Goodwill Industries, or a church).  To ensure that you have appropriate documentation you will want to be sure to make all cash contributions by check so that you will have an adequate paper trail.  Be sure to obtain either a receipt or annual statement to substantiate your deduction from the attendant organization.

Contributions in kind/real or personal property are also valid itemized expenses.  The deductible amount is limited to the fair market value (and not at times original cost), which frequently is represented by what an item would sell for in a thrift shop or flea market.  Tax law does allow for appreciating items and such as artwork or coin collections to be itemized/deducted at their fair market value.

Due care and consultation should be taken by review current law and with your CPA to ensure that you have appropriate documentation to support all charitable deductions.  Tax law I this area has been in a constant state of change for decades, typically resulting in the need for additional and heightened documentation requirements.

Miscellaneous Itemized Expenses

Taxpayers are allowed to deduct miscellaneous itemized expenses to the extent they exceed a certain percentage of their AGI (Adjusted Gross Income).  Typical expenses that qualify include job hunting, investment expenses, CPA fees and employee expenses that are not reimbursed.

Tax law is constantly in a state of flux and what you know today may not be the current law of today.  We work diligently to stay abreast of all substantive tax changes that will impact your return and personal finances.  Contact us today and get started.