Itemized Deduction

What is the Itemized Deduction?

An itemized deduction can be defined as an eligible expenditure that is incurred by the individual taxpayers on various types of products or services for claiming these expenditures on FIT (federal income tax) returns solely for the purpose of reducing their tax implications, or in other words, these are various sorts of tax-deductible expenditures that are incurred throughout the year.

Explanation

Itemized deductions are claimed by individual taxpayers for lowering their tax burden. These options are only available with 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 that are eligible to receive standard deductions. The tax bracket of an individual taxpayer and his or her filing status will ultimately determine the amount of concession he or she might receive on the tax burden. These are a type of tax-deductible expenditures that can be reduced from AGI to lower the tax burden of an individual taxpayer.

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Types

1. 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 deduction but state and local taxes paid during the year can be applied for the deduction.
2. Interest paid by Individual Taxpayer- These include home equity loan interest or mortgage interest paid expenses.
3. Unreimbursed Medical as well as Dental Expenses- These expenses include doctors’ fees, prescription charges, insurance premium, non-cosmetic surgery expenses, ambulance or transportation costs, etc. The amount of medical and dental expenses that exceed ten percent of the tax payer’s adjusted gross income and 7.5 percent if the taxpayer is above 65 years of age.
4. 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.
5. Investment Interest- Only a certain amount earned from investments shall qualify for deductions.
6. Casualty as well as theft losses (if any);
7. Miscellaneous Itemized Deductions- Such expenses can be deducted if all of these exceed 2 percent of an individual tax payer’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 expenses
• Home mortgage interests
• Charitable contribution
• Medical expenses
• Dental expenses
• The property, state and local IT (income tax)
• Job-related expenses and such other items
• Interest and taxes already paid by the taxpayer
• Miscellaneous deductions.

How to Claim?

An individual taxpayer who is seeking to claim itemized deductions can begin with filling a Schedule A form. This is a separate form, and it can be downloaded along with a 1040 form from the IRS website. Schedule A form will mention all the steps that are required for an individual taxpayer to follow for the purpose of calculating 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 deductions and standard deduction help in reducing the tax burden of an individual taxpayer. However, itemized deductions must not be confused with the standard deduction.

• In an itemized deduction, an individual taxpayer shall need to report each and every qualified 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 such other forms, whereas standard deductions do not require an individual taxpayer to get done with 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 contribution, 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 the taxpayers to itemize more deductions, which means the taxpayers 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 a time-consuming process owing to the fact that 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 this option.

Conclusion

• Types of itemized deductions are Investment interest expenses, Home mortgage interests, Charitable contribution, 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 of them are totally in contrast to one another. These deductions have their own advantages and disadvantages, and the individual taxpayers must consider them prior to opting for the same.
• It enables individual taxpayers to claim a varied range of expenses and save a lot of money in taxes. On the other hand, this can be a time-consuming process since it requires a lot of documentation and effort, and there are even restrictions on a few itemized deductions as well.

Recommended Articles

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

• Mortgage Interest Deduction
• Above the Line Deductions
• Tax Shield
• After-Tax Income Calculations
• Backup Withholding