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What is an Itemized Deduction?
Itemized deductions are eligible expenses that can be deducted on the adjusted gross income (AGI) of taxpayers. Individual taxpayers who qualify for itemized deductions can claim the deduction on their federal income tax returns which will reflect on their taxable income. There are specific expenses that are eligible for itemized deductions, the Internal Revenue Service in the United States outline eligible expenses for itemized deduction. Individual taxpayers who do not qualify for itemized deductions can use standard deduction which will also reduce their taxable income.
A Little More on What is an Itemized Deduction
The U.S government provide tax relief in the form of tax deductions and credit to individual taxpayers. There are limits to deductions that taxpayers can claim on the federal income tax returns, itemized deduction for example has rules that guide which expenses are qualified and which expenses are unqualified or deductions. Examples of expenses that qualify for itemized deductions are medical expenses, mortgage interest and charitable gifts or donations. Individuals can file for tax deductions using Schedule A with Form 1040. There are other categories through which individuals can access tax deductions and tax credits such as $3,500 tax credit on tax liability up to $15,000.
Standard vs. Itemized
There are two ways a taxpayer can claim a tax deduction, this is through itemized deduction or standard deductions. Oftentimes, taxpayers who qualify for higher deductions through itemized deductions use itemized deduction rather than standard deduction. Usually, a standard tax deduction is a fixed dollar amount that taxpayers can claim unlike itemized deductions that allows taxpayers to deduct the sum of their eligible expenses from the taxable income.
For a standard tax deduction, an individual taxpayer can claim $12, 000 while a married couple can jointly claim $24,000. Generally, both standard and itemized deductions reduce the AGI of taxpayers.
It is important to know that not all taxpayers have the option to choose between standard deduction and itemized deductions. For instance, non-residents are allowed to claim tax deduction using itemized deductions.
Which Expenses Can Be Itemized?
The expenses that are eligible to be itemized under itemized deductions are as follows:
- Mortgage interest: this qualifies taxpayers for deduction on a $1 million loan or less. By 2018, mortgage interest can be deducted on a loan of $750,000 or less. MIP (mortgage insurance premium).
- Charitable Donations: taxpayers can have up to 60% tax deduction on AGI.
- Medical Expenses
- Natural disaster losses
- Investment interest and gambling losses.
All itemized deductions are filed on Schedule A of Form 1040 and submitted to the InternalRevenue Service. Individuals who use itemized deductions need to provide receipts showing all the listed expenses, and other proofs that may suffice when receipts are unavailable.