What are Itemized Deductions?

I am very often asked if things like charity, state taxes, and medical expenses are deductible against your taxable income.  Like most things in the world of tax, the answer is not a simple yes or no.  The answer is more of a “sometimes.”  When an individual files taxes, they have two options in terms of these deductions.  They can take the standard deduction, or they can itemize their deductions.  The standard deductions for the 2019 tax year are based on filing status.  They are;

Single – $12,200

Married filing joint – $24,400

Married filing separately – $12,200

Head of household – $18,350

These deductions are “standard” meaning that any taxpayer can take this amount as a deduction to reduce taxable income.  If a taxpayer has enough qualifying expenses, they might choose to itemize their deductions instead.  There are several categories of itemized deductions, and in order for it to make sense to itemize, they should be more than the standard deduction for your filing status.  Below I will go through each of the itemized deductions and the rules for being able to deduct them.  

Medical Deductions

Taxpayers are allowed to deduct medical expenses that exceed 10% of their adjusted gross income (AGI).  If your AGI is $100,000, then you only get to deduct the portion of your medical expenses that exceed $10,000.  So if you had $12,000 in medical expenses, only $2,000 of them would be deductible.  Most medical expenses qualify.  Details on which expenses qualify will be the subject of a future article.  

State and Local Taxes

This includes state and local income tax, as well as property taxes on qualifying property.  As part of the recent Tax Cuts and Jobs Act, this deduction is limited to $10,000.  Taxpayers in high tax states may have state and local taxes that exceed this limit for which they won’t get an additional tax benefit for the amount that exceeds $10,000.  

Charitable Contributions

This includes both cash and non-cash contributions to qualifying charities.  There are limits on this deduction based on your AGI and the type of contribution.  For instance, cash contributions are limited to 50% of your AGI.  Also, special rules for substantiation of non-cash contributions apply depending on the amount.  

Gambling Losses

Gambling losses can be deducted as an itemized deduction up to the amount of your gambling winnings.  For instance, if you win $10,000 in a slot machine, and then lose that $10,000 at the blackjack table tomorrow, you may be able to deduct the $10,000 loss against your winnings.  If you don’t have enough deductions to itemize, this can be a real problem when you don’t end up itemizing.  For instance, if your only itemized deduction is a gambling loss of $15,000 and you file a married joint return with $15,000 in gambling winnings, you will have to pay tax on $15,000 of gambling winnings even though you lost the same amount.  There are special rules for same day slot play that will be discussed in a future article. 

Summary

In the right circumstances these deductions can create some excellent tax benefits.  It is important to be strategic about the timing and character of these expenses so that you can maximize the benefits if you do end up itemizing deductions.  We always recommend you reach out to our team of CPAs for details on how these deductions may apply to your specific tax situation.

Disclaimer:

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, Tax Professionals P.C.  would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.