There are certain expenses that qualify as a deduction on your income tax return. These are often times referred to as itemized deductions. Many people never take the time to learn about itemized tax deductions because they rely on the standard deduction every year. While there is nothing wrong with this, you may be able to save even more money by itemizing.
As a general rule of thumb, if your itemized deductions are greater than the standard deduction, you should definitely itemize. Along with this, you also want to rely on itemized deductions if you find yourself in one of the following situations: you do not qualify for the standard deduction; you have a large amount of medical bills to be itemized; you pay taxes and interest on property; you have a lot of business expenses; or you have made big charitable contributions during the past tax year.
Of course, it is important to note that the majority of tax deductions are governed by the two percent of adjusted gross income rule. Simply put, this means the amount of expenses greater than two percent are deductible only for the amount in excess of two percent. For medical expenses, it is the amount over 7.5 percent of your adjusted gross income that is tax-deductible.
Some of the expenses that you may be able to include when itemizing your deductions are as follows: real estate taxes, personal property taxes, medical expenses, dental expenses, local and state income tax, home mortgage points, theft losses, charitable contributions, and job expenses. Of course, these are just a few of the more common itemized tax deductions. There are many others that you may be able to include, which will reduce your total amount of taxable income.
While you may be interested in the standard tax deduction, there are several groups of people who are required to itemize. They include: a married person filing separately with a spouse who is itemizing; a person who is classified as a nonresident alien; and a person who has changed his accounting cycle and is not filing for a full 12-month period.
There are some itemized tax deductions that are limited if your adjusted gross income is too high ― in 2009, the income cap was $83,400 for single or married filing separately and $166,800 for married filing jointly.
The better you understand itemized tax deductions the easier it will be for you to file your income tax return each year.