Schedule A – Itemized deductions is a highly complicated tax schedule. It is probably one of the most revered and challenged tax schedules developed by the Internal Revenue Service (IRS). Schedule A is a perfect example of how the tax law accommodates every personal and business financial transaction.
Most taxpayers usually qualify for the standard deduction. The amount of standard deduction allowed on line 40 of form 1040 is contingent upon the filing status of a taxpayer. If a taxpayer incurs certain specific itemized deductions (which will be discussed further below); the taxpayer can deduct these items on Schedule A (2013). Itemized deductions in the aggregate must exceed the standard deduction amount in order to be implemented and reduce the adjustable gross income.
Individual taxpayers have plenty of misconceptions regarding the tax law. Misconceptions related to Schedule A deductible items are the most common. Not all taxes paid, charitable deductions and un-reimbursed job expenses qualify as Schedule A itemized deductions. There are certain rules that each deductible item must surpass before it can qualify to become deductible on Schedule A.
Schedule A is broken down into 7 distinct categories. Each category has its own set of unique rules; which will be discussed further below. Here is a link to Schedule A. (2013)
Category 1 – Medical & Dental Expenses
Medical and dental expenses incurred by an individual taxpayer and expenses related to qualified dependents of the taxpayer, are deductible. Medical expenses such as health insurance premiums paid, doctor visits, rehabilitation costs, transportation to medical facilities, etc. are considered to be “allowable medical deductions”. When determining which medical costs are considered “allowable medical deductions”, the main question to consider is: “Are these costs and expenses necessary medical expenses?” If yes, more likely than not, the medical expenses are deductible. Medical expenses such as life insurance premiums, health club gym membership, over the counter medicine, etc. are not deductible.
This graph highlights some of the most common deductible and non-deductible medical expenses.
Qualified medical expenses are netted against any insurance reimbursement received by the taxpayer, during the taxable year. Any reimbursement that is received in future years is considered part of gross income of that year.
If an individual taxpayer is over 65 years old, the taxpayer’s medical expense floor is limited to 7.5% of Adjusted Gross Income. The 7.5 AGI floor is considered to be the limit that is not allowed to be deducted. This amount is deducted after the initial medical expenses are netted from insurance reimbursements. If the individual taxpayer is under 65 years old, the AGI limitation is raised to 10%. This increase limits the amount of medical expenses that can are deducted on Schedule A.
Click to see explained examples of Medical Expenses Deductions.
Category 2 - Taxes
Taxes that are paid by a taxpayer during the taxable year are deductible. A common misconception is that both taxes and fees are tax deductibles on Schedule A. Certain taxes are deductible; those will be discussed and elaborated further. Fees regarding licenses, bridge and highway tolls are not deductible for individual purposes. These fees are deductible on Schedule C, only for business purposes. There is no AGI limitation for taxes paid.
Property Taxes:
State, local and foreign property taxes are deductible. They must be ad valorem taxes. The value of an ad valorem tax is evaluated on the cost of the property. Assessments of property are not considered to be deductible.
State & Local Income Taxes or Sales Taxes
State and local income taxes are deductible in the year paid for a cash basis taxpayer. For an accrual basis taxpayer, those taxes are deductible in the year accrued. The taxpayer must be legally obligated to pay these taxes in order to deduct them on Schedule A.
Category 3 – Interest Paid
There are only two types of interest deductible on schedule A. Both interest related to mortgages and investments are deductible. Personal/consumer interest is not deductible. Business interest expenses are not deductible on Schedule A; rather they are deductible on Schedule E. There are no AGI limitations for interest paid.
There are two types of interest which are regarding mortgages and homes. The first is related to the interest incurred when purchasing, building, improvement and renovations of the home. Any interest related to the acquisition is deductible. There is a limit of $1,000,000 for taxpayers who qualify for married filing jointly, single, head of household filing status and $500,000 for those who qualify as married filing separately. This interest is referred to as “Acquisition Indebtedness”.
The second type of interest is related to the interest incurred or debt that is taken on and secured by the taxpayers first or second home. This interest has nothing to do with the purchasing, building, improvement or renovations of the home. There is a limit of $100,000 for taxpayers who qualify for married filing jointly, single, head of household filing status and $50,000 limit for those who qualify as married filing separately.
Category 4 – Charitable Contributions
Charitable contributions to qualified organizations are deductible. Qualified organizations are those that serve the social welfare needs, thus they are relieving the government of this responsibility. A qualified organization is a corporation, trust, community chest, fund, or foundation that is organized in the United States. The Internal Revenue Service (IRS) publishes a list of organizations that have applied to obtain tax-exempt status. This is extremely useful for individual taxpayers to confirm a charitable cash contribution is properly tax deductible. Click on this link to search for organizations that have tax exempt status.
Charitable contribution is deducted in the year it is made and/or paid. Documentation is required for any charitable contribution to be considered taxable. If a contribution of a physical item is over five hundred dollars, the taxpayer must file form 8283. Contributions to political campaigns and donating to needy families are not considered charitable contributions. They cannot be deducted on Schedule A. Although it is a nice deed to assist a well-deserving family, they cannot be considered tax deductible since the amount donated cannot be validated by the Internal Revenue Service (IRS).
There are two types of contributions a taxpayer can make. The first is a monetary (tangible) contribution and the second is an intangible (physical) contribution. Gifts to charities can be either monetary amounts or physical items. Monetary items are deductible up to a 50% ceiling limitation of AGI. Physical items are deductible up to 30% ceiling limitation of AGI. There is a charitable contribution carryover that can be carried forward 5 years.
Monetary items can be in cash, check or credit card. Services such as volunteering are not allowed to be deducted, however expenses incurred while performing those services are deducted. (Volunteering time at a local youth camp is not deductible, however the amount spent on transportation to the youth camp is deductible).
Property or physical items are further separated into categories. Property is deductible up to the lessor of its base value or fair market value. General property in this instance refers to items that are considered “Ordinary Income Property”. These items are deductible to the lessor of its fair market value or basis.
Capital gain property is the opposite. These are assets that are held for a longer period of time. These assets are deductible to the lessor of 30% of AGI. Overall if a taxpayer has both monetary and physical contributions, the total amount of deductions are deductible to the extent of 50% of AGI.
Category 5 – Casualty and Theft Losses
All casualty and theft losses are deductible to the extent the damage exceeds 10% of AGI. Some examples of casualty losses are vandalism, fire damages, car/boat/motorcycle accidents, storm damages, hurricanes, etc. These losses must be unexpected. The casualty and theft losses must exceed the insurance reimbursement, if any, a $100 floor and the 10% AGI limitation.
Category 6 – Miscellaneous Deductions
Miscellaneous deductions consist of several items. All of these items in the aggregate must exceed the two percent of limitation.
- Unreimbursed business expenses consist of expenses related to transportation, meals, and hotel expenses during the course of employment. Expenses incurred by the dependents of a taxpayer are not deductible on the taxpayer’s tax return; rather they are individually deductible on the dependents tax return.
- In order for education expenses to be deductible on Schedule A, they must be for the sole purpose of maintaining or improving the skills of the taxpayers in their respective professions. Education expenses not related to the taxpayer’s profession are not deductible.
- Other expenses consist of smaller expenses that are deductible such as:
- Business gifts – Maximum $25 per recipient
- Tax preparation fees
- Subscriptions to professional journals
- Activities not engaged for business purposes
- Job hunting expenses
- Union dues
Category 7 – Other Miscellaneous Deductions
These expenses do not have to exceed the two percent AGI limitation. These expenses can be deducted in full. There are two types of deductions that qualify for this category:
- Gambling losses – to the extent of gambling proceeds
- Estate taxes paid –on income received from a decedents estate
These are the seven distinct categories that make Schedule A one of the most unique and intricately complicated tax schedules.