Last week in our blog, we talked about “Above-the-Line” deductions on your tax return. This week, we’ll discuss itemized deductions. As we mentioned last week, it is very important to keep good records of your deductible expenses.
On your tax return, after you have calculated your Adjusted Gross Income, you are able to deduct from that amount either your Standard Deduction or your Itemized Deductions. If your Itemized Deductions are greater than your Standard Deduction, you should itemize and complete Schedule A to reduce your taxable income and, thus, reduce your income taxes.
The amount of your standard deduction is based on your filing status. For 2014, if your filing status is Single, your standard deduction is $6,200. If your filing status is Married filing jointly, your standard deduction is $12,400. If your filing status is Head of Household, your standard deduction is $9,100. If you are over age 65 or you are blind, your standard deduction is higher.
On to the itemized deductions on Schedule A.
Medical and Dental Expenses
Your total of medical and dental expenses must be greater than 10% of your adjusted gross income to be deductible. Besides out of pocket payments made to medical, dental, and optical providers, deductible medical expenses include health insurance premiums, premiums for qualified long term care insurance, nursing care, treatment programs for tobacco cessation and for drug or alcohol addiction, lodging expenses (but not meals) while away from home for medical care, ambulance service, and transportation costs. You cannot include the cost of medical care that was paid by your insurance company.
Deductible expenses in this category include state and local income taxes, real estate taxes, and personal property taxes. Personal property taxes are deductible only if the tax was based on the item’s value. For example, in Nebraska the annual amount you pay to license your vehicle is not entirely deductible. A portion of the cost is based on the value of your vehicle and the remainder is other fees such as plate fees.
Home mortgage interest and points are deductible in this section, as well as some mortgage insurance premiums and investment interest. If you have deductible investment interest, you must complete Form 4952 and attach it to your tax return.
Gifts to Charity
Contributions and gifts to charitable organizations are deductible. If you are unsure about the organization, check them out on www.irs.gov under “Exempt Organizations Select Check.”
If you contribute more than $250 in total to any organization in 2014, you must receive a statement from the charity showing the amount of money contributed or the value of the gift and whether you received anything of value back from the organization. An example would be you paid $100 for a dinner at the charity fund raiser. A portion of the $100, the value of the meal, would not be deductible.
If you make contributions of property (not cash) that total more than $500, you much complete Form 8283 and attach it to your tax return. For high value items, such as real estate or works of art, there are additional rules and you will most likely need to have the item appraised.
Casualty and Theft Losses
Complete Form 4684 to deduct any losses you have incurred through theft or casualty.
In general, the total of your miscellaneous itemized deductions must be greater than 2% of your Adjusted Gross Income or you cannot deduct them. Items included in miscellaneous deductions are: unreimbursed employee expenses (travel for your job, union dues, job education), tax preparation fees, and safe deposit box fees.
If the total of your deductible expenses in all these categories is greater than your standard deduction, you may want to itemize to reduce your taxable income and your income tax. For more information, talk to your tax advisor or go to www.irs.gov.
Next week, we will discuss other deductions and credits.Judith Ackland has more than 26 years of experience in accountancy and financial planning, including seventeen years as a CFO of a diverse business. She started Crystal Financial in 2010 to help a wide array of individuals, families, and business owners better understand their finances and how good financial management could help them achieve their goals. Judith has an MA in Professional Accountancy from the University of Nebraska at Lincoln as well as a Certified Public Accountant Certificate and a Certified Financial Planner designation.