Itemized Deductions on US tax return

Published on November 1, 2023
by Clark Stott

Clark Stott has been with Expat Tax Online since 2015. Being a dual national based in the UK, Clark has unique experience helping US citizens (and Accidental Americans) become tax compliant via the Streamlined Tax Amnesty program. Clark likes to help Americans in the UK keep their tax situations as simple as possible to avoid harsh IRS treatment.

What are Itemized Deductions?

One term that often pops up is “itemized deductions.” So, what are these and how do they differ from standard deductions?

Itemized deductions are specific expenses that the IRS allows you to subtract from your Adjusted Gross Income (AGI) to reduce your taxable income. The purpose of itemized deductions is to offer taxpayers a way to lower their tax liability based on specific spending or life circumstances. Now, you might be asking, how does this differ from standard deductions? Unlike standard deductions, which are a fixed amount, itemized deductions vary based on your actual expenditures.

The impact of itemized deductions on your tax liability can be significant. By reducing your taxable income, you could potentially lower your overall tax bill. However, the total amount of your itemized deductions must exceed the standard deduction for it to be financially beneficial.

What are the Most Common Itemized Deductions?

When it comes to itemized deductions, not all expenses are created equal. So, what are the most common ones? Here’s a quick rundown:

  • Medical Expenses: Costs related to healthcare, including doctor visits and prescription medications.
  • Mortgage Interest: Interest paid on a home mortgage can often be deducted.
  • State and Local Taxes: Taxes paid to state and local governments can be itemized.
  • Charitable Contributions: Donations to qualified charitable organizations are deductible.

When Should I Consider Itemizing Deductions?

The decision to itemize deductions is not one to be taken lightly. So, when should you consider it? Itemizing deductions becomes advantageous when the total amount of your eligible expenses exceeds the standard deduction. Factors that might influence this decision include large medical expenses, significant charitable contributions, or substantial state and local taxes.

How Do I Know If I'm Eligible to Itemize Deductions?

Eligibility for itemizing deductions is another crucial aspect. So, how do you know if you’re eligible? Income thresholds and filing status play a significant role. For example, if you’re filing as “Married Filing Separately,” both you and your spouse must either itemize or take the standard deduction. You can’t mix and match.

What Expenses Can Be Deducted Under Medical and Dental Expenses?

Medical and dental expenses often make up a large chunk of itemized deductions. But what exactly can you deduce? Eligible expenses include payments for diagnoses, treatments, and even preventive care. However, there are limits. Only the amount that exceeds 7.5% of your adjusted gross income (AGI) can be deducted.

How Do I Deduct Mortgage Interest on my Tax Return?

Mortgage interest is often one of the largest deductions available. But how exactly can you claim it? The IRS allows you to deduct interest paid on a mortgage for a primary or secondary home. However, there are limitations. For instance, the mortgage must be a secured debt on a qualified home in which you have an ownership interest. Also, the amount you can deduct may be limited if your mortgage debt exceeds $750,000 ($375,000 if married filing separately).

Can I Deduct State and Local Taxes on my Federal Return?

State and local taxes are another area where you can potentially save. So, can you deduct these on your federal return? Absolutely. You have the option to deduct either state and local income taxes or state and local sales taxes, but not both. If you opt for income taxes, this includes withholding, estimated payments, and even payments made for the prior year. If you go for sales taxes, you can either use the actual expenses or the optional state sales tax tables provided by the IRS.

What Types of Charitable Contributions Can I Deduct?

Charitable contributions are a popular itemized deduction. But what types can you deduce? Cash donations to qualified organizations are generally deductible. However, there are record-keeping requirements. For any cash donation over $250, you’ll need a written acknowledgment from the charity. For non-cash donations, different rules apply, such as the need for a qualified appraisal for items valued over $5,000.

Are There Any Limitations on Itemized Deductions for High-Income Taxpayers?

You might be wondering, “Are there any limitations on itemized deductions if I’m a high-income taxpayer?” The answer is yes. The IRS imposes what are known as Pease limitations, named after the congressman who introduced them. These limitations gradually phase out itemized deductions as your income rises. For example, if your adjusted gross income (AGI) exceeds a certain threshold, the total amount of your itemized deductions may be reduced by up to 80%.

Can I Deduct Job-Related Expenses on my Tax Return?

So, what about job-related expenses? Can they be deducted? Indeed, they can, but there are some caveats. Here are some key points to consider:

  • Unreimbursed Employee Business Expenses: If you’ve spent money on work-related items that your employer hasn’t reimbursed, these could be deductible. This includes everything from travel expenses to professional dues.
  • Criteria for Deducting Job-Related Costs: The IRS stipulates that these expenses must be “ordinary and necessary” in your line of work. Moreover, you must not have received reimbursement from your employer.

What is the Limitation on Deductions for Miscellaneous Expenses?

Miscellaneous expenses are another area that often raises questions. “What’s the limitation on these deductions?” you might ask. Well, some miscellaneous itemized deductions are subject to a 2% adjusted gross income (AGI) limit. This means you can only deduct the amount that exceeds 2% of your AGI. Categories that fall under this include tax preparation fees and certain investment expenses.

How Do I Claim Casualty and Theft Losses as Itemized Deductions?

Let’s start with a question that might be on your mind: “How can I claim casualty and theft losses on my tax return?” Good news, you can, but there are some conditions. To be eligible for these deductions, the loss must be sudden, unexpected, and caused by an identifiable event. Think natural disasters or burglaries.

Calculating these losses involves determining the decrease in fair market value of the property due to the casualty, minus any insurance or other reimbursements. You’ll report these on Form 4684, “Casualties and Thefts,” and the deductible amount will be transferred to Schedule A of your Form 1040.

Can I Deduct Expenses Related to the Production of Income, Like Investment Interest?

Another question you might have is, “Can I deduct investment interest expenses?” Yes, you can, but again, there are rules. Investment interest expenses are the interest paid on money borrowed to purchase taxable investments. This doesn’t include interest on tax-exempt investments, like municipal bonds.

Special rules apply to investment interest deductions. For instance, your deduction is generally limited to your net investment income. To claim this deduction, you’ll need to file Form 4952, “Investment Interest Expense Deduction.”

Are There Any Deductions Related to Education Expenses?

Education expenses are a hot topic, especially for expats who might be dealing with student loans or other educational costs. So, can you deduct these? Absolutely. Student loan interest is one of the few deductions you can claim as an adjustment to income rather than an itemized deduction. This means you can claim this deduction even if you opt for the standard deduction.

But what about other education-related deductions and credits? You might be eligible for the American Opportunity Credit or the Lifetime Learning Credit, which can offset some of the costs of higher education. These are credits, not deductions, but they can still reduce your tax liability.

What Documentation and Records do I Need to Support my Itemized Deductions?

First things first: what kind of documentation do you need to keep? Accurate record-keeping is your best friend when it comes to itemized deductions. This includes keeping receipts, bills, and even certain notifications or acknowledgments for things like charitable contributions.

But how long should you keep these records? The IRS generally recommends retaining tax records for three years from the date you filed the original return. However, if you claim a loss from worthless securities or bad debt deductions, you should keep those records for seven years.

How do I Report Itemized Deductions on my Tax Return?

The answer lies in Schedule A of Form 1040. This is where you’ll list various types of itemized deductions, such as medical expenses, state and local taxes, and mortgage interest.

Calculating the total amount of your itemized deductions involves adding up all the individual deductions you’re claiming. Once calculated, this total replaces the standard deduction amount on your tax return, potentially reducing your taxable income and, by extension, your tax liability.

Is it easier to claim Standard Deductions as a US citizen living abroad?

It’s certainly easier, yes. The vast majority of US citizens living outside of the United States claim Standard Deductions on their US tax return. Most Americans living abroad have less claimable deductions for the Standard Deduction. Claiming the Standard Deduction is far less work too.

The information provided herein is for general informational purposes only and should not be considered professional advice. While we aim to provide helpful and accurate information, we make no warranties or guarantees about the accuracy, completeness, or adequacy of the information contained here or linked to from this material.