Federal tax law allows you to deduct the cost of some of the things you buy during the year from your taxable income. Itemized deductions are the write-offs listed on the form called Schedule A. If you don't claim the items on Schedule A, you can take what's called the standard deduction on Form 1040 instead.
Deductions You Can Itemize
The one-page Schedule A includes a list of several allowable types of deductions. Each deduction comes with its own requirements and rules for claiming the write-off:
- Medical expenses.
- State and local property or sales taxes.
- Interest on your mortgage.
- Losses from theft or "casualty" — Internal Revenue Service-speak for damage from fire, flood, wind and other disasters.
- Miscellaneous deductions, which include unreimbursed work expenses and the cost of hiring a tax preparer.
To claim the deductions, write down every one that you qualify for, then add the totals. Report this on your Form 1040 instead of claiming the standard deduction. Subtract this from your income following the Form 1040 instructions.
Rules and Restrictions
Each deduction comes with its own requirements. If you don't meet them, you can't take the write-off, even if you use Schedule A. Take medical expenses, for example. The IRS has a long list of expenses that do -- or don't -- qualify in IRS Publication 502 on medical expenses. You can deduct the cost of prescription drugs, but not over-the-counter medications, for instance.
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After you add up all the qualifying medical expenses, you subtract 10 percent of your adjusted gross income, a figure you calculate on the front of your 1040. Your remaining medical expenses are all you can write off. The intention is to limit the deduction to people with huge expenses relative to their income.
Don't overlook the miscellaneous deductions, detailed in IRS Publication 529. This is a big, assorted group of deductions you can take if you qualify, including:
- Work expenses your employer didn't pay you for, such as mileage.
- Hobby expenses. If, say, you sell jewelry but don't make a profit on it, the IRS counts it as a hobby, not a business. You can write off expenses up to the amount of your income.
- Appraisal fees to figure, for example, the value of a stolen item or a valuable item you gave to charity.
The IRS has a lot of experience with people claiming deductions that don't qualify. Many people would like to write off the cost of their business clothes as an employee expense, especially if it's something only worn on the job. The IRS says this is only a valid write-off if your employer requires that you wear the clothes and if they're unsuitable for everyday wear. A business suit doesn't qualify. Safety gear or a clown costume would. Likewise, health club memberships and running shoes aren't deductible as a medical expense, even though it's healthy to exercise and lose weight.
The odds are very low that the IRS will audit you. If an auditor does want to review your taxes, she may ask to see proof of your itemized deductions:
- A receipt or cancelled check for the donation you made to charity.
- A bill for the property taxes you paid.
- Receipts or bills for medical expenses you paid.
Unless the IRS suspects you of major error or fraud, it can audit only up to three years back. The agency recommends you keep most records for three years after you file the return.