Itemized deduction

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An itemized deduction is an eligible expense that individual taxpayers in the United States can report on their federal income tax returns in order to decrease their taxable income.

Most taxpayers are allowed a choice between the itemized deductions and the standard deduction. After computing their adjusted gross income (AGI), taxpayers can itemize their deductions (from a list of allowable items) and subtract those itemized deductions (and any applicable personal exemption deductions) from their AGI amount to arrive at their taxable income amount. Alternatively, they can elect to subtract the standard deduction for their filing status (and any applicable personal exemption deduction) to arrive at their taxable income. In other words, the taxpayer may generally deduct the total itemized deduction amount, or the standard deduction amount, whichever is greater.

The choice between the standard deduction and itemizing involves a number of factors:

Deductions are reported in the tax year in which the eligible expenses were paid. For example, an annual membership fee for a professional association paid in December 2009 for year 2010 is deductible in year 2009.

Contents

Examples of allowable itemized deductions

There are a number of allowable deductions:

Miscellaneous itemized deductions

It is important to distinguish miscellaneous itemized deductions from other “normal” itemized deductions. The reason for this is because miscellaneous itemized deductions are subject to a 2% floor [2], a.k.a. the "2% Haircut." A taxpayer can only deduct the amount of miscellaneous itemized deductions that exceed 2% of their adjusted gross income. [3] For example, if a taxpayer has adjusted gross income of $50,000 with $4,000 in miscellaneous itemized deductions, the taxpayer can only deduct $3,000, since the first $1,000 is below the 2% floor.

4,000 - .02(50,000) = 3,000

There are 12 deductions listed in 26 U.S.C. § 67(b). These are NOT miscellaneous itemized deductions, and thus not subject to the 2% floor (although they may have their own rules). Any deduction not found in section 67(b) is a miscellaneous itemized deduction.[4] Examples include:

Limitations

If the taxpayer's adjusted gross income is above a threshold (or "applicable amount"), then the total allowable itemized deductions is reduced by 1/3 of the lesser of

In 2009, the threshold adjusted gross income is $166,800 ($83,400 if married filing separately).
So, for example, if one's adjusted gross income is $300,000 and one has $20,000 in itemized deductions, first figure out 3% of the excess above $166,800:

.03(300,000 - 166,800) = $3996

Then figure out 80% of the total deductions

.80(20,000) = $16,000

Finally, determine which value is lesser, then take 1/3 of this value. In this instance, the lesser value is $3996 so the taxpayer's total itemized deductions shall be reduced by $3996 divided by 3, or $1332. This means out of the $20,000 itemized deductions claimed, only $18668 will be allowed.

$20,000 - $1332 = $18,668

Even though the Internal Revenue Code sets the applicable amount at $100,000, that amount is subject to inflation.[7] Therefore, it's necessary to double-check the Consumer Price Index for the applicable amount for the current year.

In addition, this limitation on itemized deductions is applied after any other limitation.[8] This means that you first need to figure out the total allowable miscellaneous itemized deductions, etc., before determining any limits on the total amount of deductions.

Phaseout

This limitation of itemized deductions has been "phased out."[9] For taxable years 2006 and 2007, the amount was reduced to 2/3 of the limitation, and for taxable years 2008 and 2009, the amount was reduced to 1/3 of the limitation. This "phase out" was completed on January 1, 2010.[10]

Notes

  1. ^ http://www.irs.gov/app/vita/basic_module.jsp
  2. ^ 26 U.S.C. § 67
  3. ^ 26 U.S.C.
  4. ^ 26 U.S.C. § 67(b)
  5. ^ Chirelstein, Marvin A., Federal Income Taxation 198 (Foundation Press, 10th Ed., 2005)
  6. ^ 26 U.S.C. § 68
  7. ^ 26 U.S.C. § 68(b)
  8. ^ 26 U.S.C. § 68(d)
  9. ^ 26 U.S.C. § 68(f)
  10. ^ 26 U.S.C.

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