Of an estimated 148.1 million federal income tax returns filed
for the 2014 tax year, just under 44 million claimed itemized deductions.
Source: Individual Income Tax Returns Publication 1304 (Complete Report), IRS.gov, 2/10/17 | | Deductions
"Above" vs. "below" the line
Adjustments to income are deductions that are subtracted
from your total, or gross, income to arrive at your adjusted gross income
(AGI). These deductions are often described as "above-the-line" deductions
because they are factored in above the line on which AGI is calculated. Note
that you can claim any above-the-line deductions to which you are entitled
regardless of whether you itemize deductions on IRS Form 1040, Schedule A.
Common above-the-line deductions
- Educator expenses
- Health savings account deduction
- Moving expenses
- Deductible part of self-employment tax
- Contributions by self-employed individuals to SEP,
SIMPLE, and qualified plans
- Health insurance deduction (self-employed individuals)
- Alimony paid
- Deductible contributions to a traditional IRA
- Student loan interest deduction
- Deduction for qualified higher-education expenses
(tuition and fees)*
*Available for 2016, but not for 2017 (absent new
legislation)
Other deductions are factored in after AGI is
calculated. It's important to note that these "below-the-line" deductions
provide a tax benefit only if you itemize deductions on Schedule A, and
generally only if your Schedule A itemized deductions are greater than your
standard deduction amount. Note as well that the allowable amount of some of
these deductions depends in part on the amount of your AGI. For example,
medical deductions are allowed only to the extent that they exceed 10% of AGI.
Standard deduction
The standard deduction is a fixed dollar amount, indexed
annually for inflation, that is determined according to your filing status
(e.g., married filing jointly, single). An additional standard deduction amount
applies if you (or your spouse, if you're married and file a joint return) are
age 65 or older. An additional standard deduction amount also applies for
individuals who are blind.
2017 Standard Deduction Amounts | Filing Status /
Factors | 2017 |
|---|
| Married filing jointly or qualifying
widow(er) | $12,700
| | Head of household | $9,350
| | Single | $6,350
| | Married filing
separately | $6,350
| | Additional deduction for age 65+ or
blind (single or head of household) | $1,550
| | Additional deduction for age 65+ or
blind (all other filing statuses) | $1,250
|
Example:
For tax year 2017, Jack, 62, and Jill, 47, are married
filing jointly. Neither is blind. They decide not to itemize their deductions.
Their standard deduction is $12,700. If Jack was blind, their standard
deduction would be $12,700 plus $1,250, or $13,950. If both were blind, their
standard deduction would be $12,700 plus $2,500, or $15,200. If both were blind
and Jack was also 65, their standard deduction would be $12,700 plus $3,750, or
$16,450. If both were over 65 and blind, their standard deduction would be
$12,700 plus $5,000, or $17,700.
Note:
If you can be claimed as a dependent on another taxpayer's
tax return, your standard deduction in 2017 is generally limited to the greater of (a)
$1,050 or (b) the sum of $350 and your earned income for the year, but not more
than the standard deduction you could otherwise have claimed (if you could not
be claimed as an exemption by someone else).
Itemized deductions
Itemized deductions are various deductions reported and
claimed on Schedule A of your federal income tax return (Form 1040). They
include certain personal expenses, such as medical expenses, mortgage interest,
state taxes, charitable contributions, theft losses, and miscellaneous itemized
deductions. If you have enough of these types of expenses, your itemized
deductions may exceed the standard deduction to which you're entitled. In that
case, itemizing deductions may be advantageous. If your itemized
deductions are less than your standard deduction, you'll generally want to use
the standard deduction.
There are a few things worth noting, however. First, if you
file your tax return using the married filing separately status and your spouse
itemizes deductions, you cannot take a standard deduction. Any deductions you
take must be itemized. Second, if you are subject to the alternative minimum
tax (AMT) (discussed later), you might be better off itemizing your deductions
even though your total itemized deductions do not exceed your standard
deduction — that's because the standard deduction is reduced to zero for AMT purposes. Finally, itemized deductions are limited once
your AGI reaches a certain level.
Itemized
Deduction Breakdown for 2014 Tax Year Based on percentage of total itemized deduction dollars
claimed by taxpayers for 2014 tax year. Source: Individual Income Tax Returns Publication 1304 (Complete Report),
IRS.gov, 2/10/17 2017 AGI Thresholds for Itemized Deduction
Limitation | Filing Status | AGI
Threshold |
|---|
| Married filing jointly or qualified
widow(er) | $313,800
| | Head of household | $287,650
| | Single | $261,500
| | Married filing
separately | $156,900
|
Note:
Total itemized deductions must be reduced by the smaller of
(a) 3% of the amount by which your AGI exceeds the AGI threshold for your
filing status or (b) 80% of your itemized deductions that are affected by the
limitation. Deduction amounts relating to medical and dental expenses,
investment interest expenses, nonbusiness casualty and theft losses, and
gambling losses are not subject to this limitation.
Timing or "bunching" deductions
For most people, income is reported in the year that it's
received, while deductions are generally taken for the year in which the
expenses are paid. In many cases, you can control whether you incur an expense
this year or next. That means you can control the timing of your itemized
deductions to some extent. For example, paying medical expenses in December
rather than in January potentially accelerates the deduction for those expenses
into the earlier year. Postponing major dental work — scheduled for December — to
January would delay the expense and the resulting deduction until the
following year.
Why would you want to do that? One reason might be if those
deductions are worth more to you in one year than in the other. For example, if
you're in a higher income tax bracket this year than you expect to be in next
year, you may want to accelerate your deductions into the current year to help
minimize your tax liability. Or, if you find that your itemized deductions
typically fall just short of the standard deduction amount that applies to you,
you might try "bunching" deductions in alternate years to exceed the standard
deduction amount in those years.
For example, let's say that you file as single and have
total itemized deductions of $6,300 for 2017 — less than the $6,350 standard
deduction amount for 2017. Let's assume as well that you will be in a similar
situation next year, with itemized deductions that equal your standard
deduction amount. In this situation, your itemized deductions provide no tax
benefit. Consider what would happen, however, if you were able to defer $1,000 in
allowable deductions to next year. There would be no effect on your 2017 taxes,
since you were already claiming the standard deduction amount. But next year,
your itemized deductions would exceed your standard deduction amount by $1,000,
giving you an additional $1,000 in deductions that would otherwise have been
lost.
Bunching deductions can also help at a more granular level.
Some deductions are subject to an AGI threshold. For example, medical and
dental expenses are generally deductible only to the extent that unreimbursed
expenses exceed 10% of your AGI. If you're close but under the AGI threshold, consider whether
taking steps to "bunch" medical expenses into a single year might allow you to
exceed the threshold in a given year, resulting in additional deductions that
would otherwise have been lost.
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