You can deduct only certain amounts of some types of itemized deductions. The amount you can deduct is based on different limits, depending on the type of itemized deduction.
Our tax software figures these limits for you and reduces your deductions where appropriate.
Most of the limits are figured using a percentage of your adjusted gross income (AGI).
Your actual deduction will be calculated by taking your total expense, for that type of deduction, and then subtracting the appropriate percentage of your AGI.
For example, your miscellaneous itemized deductions must be greater than 2% of your adjusted gross income before you get a tax benefit for any of those expenses.
This type of percentage limit is called a floor, because
you have to come up to the floor before you can start deducting any of the expenses.
Here are some of the expenses you can deduct and their limitations:
Medical and dental expenses
As a general rule, you can deduct any expense you pay for the prevention, diagnosis, or medical treatment of physical or mental illness, and any amounts you pay to treat or modify any structure or function of the body for health purposes (but not for cosmetic reasons). You can also deduct transportation costs for getting to where you can receive this kind of medical care, your health insurance premiums, and your costs for prescription drugs and insulin.
Your medical expenses must equal at least 10% (7.5% if 65 and older) of your adjusted gross income before they give you a tax benefit. This means that the medical expenses needed to meet the 10% floor don't give you a tax benefit.
Interest on both your primary residence and one other residence is deductible.
The limits on deductible home mortgage interest expense are:
Personal interest (such as credit card debt) is not deductible. Interest on student loans is deductible even if you don't itemize your deductions.
Deduct your charitable contributions in the year you make them. For most contributions, the maximum you can deduct in one year is 50% of your adjusted gross income. However, there are certain types of contributions that have a limit of 20% or 30% of your adjusted gross income.
If your contributions go over the limit, you can carry the
unused deduction forward to the next tax year. However, be sure to enter all
of your contributions on this year’s return, or the IRS won’t know
why you are claiming a carryover deduction next year.
Casualty and theft losses
For most personal casualties and thefts, deduct the loss in the year it happened. If you have a loss in a federally declared disaster area, you might be able to deduct the loss in another year.
The limit on casualty and theft loss deductions, for non-business property, is:
New recordkeeping requirements for cash contributions.
You cannot deduct a cash contribution, regardless of the amount, unless you keep as a record of the contribution a bank record (such as a canceled check, a bank copy of a canceled check, or a bank statement containing the name of the charity, the date, and the amount) or a written communication from the charity. The written communication must include the name of the charity, date of the contribution, and amount of the contribution.
Miscellaneous deductions are usually unreimbursed employee expenses or business and investment expenses.
The total of your miscellaneous deductions must be more than 2% of your adjusted gross income before you can start deducting anything.
The floor on miscellaneous deductions is 2% of your adjusted gross income.
Let’s say your adjusted gross income is $10,000, so 2% of $10,000 is $200. This means that to meet the 2% floor, you must have at least $200 in miscellaneous expenses.
However, only the amount over the $200 actually reduces your taxable income.
Now let’s say that you have $500 in miscellaneous
expenses. The first $200 meets the 2% floor limit, leaving you with $300 that
you can deduct from your taxable income.