'Itemized Deductions' is explained in detail and with examples in the Accounting edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Itemized Deductions refer to an amount of money that is subtracted off of an individual American’s adjusted gross income. These deductions are comprised of money the individuals spend on some services and goods that officially qualify during the tax year in question. It is the American IRS Internal Revenue Service which decides what deductions specifically will be permitted as outlined in their codes. These include certain expenses like charitable gifts, local and state taxes, mortgage interest, and medical costs.
Most of the time, such itemized deductions will be restricted to only a particular percentage of the adjusted gross income. Itemized deductions in fact are alternatives to the IRS-granted standard deduction. The itemized variations mandate that taxpayers who employ them must keep careful track of all expenses that could reduce adjusted gross income during the tax year in question. This takes time, work, and effort.
Those persons who have no choice but to often spend huge amounts of money on mortgage interest, local and state taxes, medical care, and other deductible expenses will often save more from their annual tax bill by itemizing. Yet the U.S. tax laws are not so favorable to this type of deducting, as they establish certain spending minimums which the individuals have to surpass before they are able to take and apply the deductions in question.
It often helps to consider an example to demystify difficult concepts like this. Look at the medical category. Only those costs that are higher than 7.5 percent of the filer’s adjusted gross income will be deductible at all. If individuals do not spend that minimum amount, then sadly not any of their medical expenses will be allowed to be deducted.
These tax reductions are crucially important come tax time as they actually reduce individuals’ taxable income. Lower taxable income equates to a lower tax bill in the end. Taxpayers have the choice of deploying the itemized deductions or opting instead for the standard deduction which the IRS sets out each year. Ultimately it is taxpayers’ personal and family circumstances which will determine which of the two methods are more advantageous though.
According to the Internal Revenue Service, the majority of taxpayers in America opt for the standard deduction. What makes this more confusing is that the so-called standard deduction is not one single, simple to grasp number. Instead it varies for every filing status every year. It becomes higher for retirement aged people over 64 and for blind taxpayers than for normal situation individuals. The amounts are also a moving target ultimately as the IRS adjusts them for inflation most every year.
As an example, married couples filing jointly will get significantly higher standardized deductions than will only an individual or even head of household filer. In fact married couples who filed jointly have seen their standard deduction amounts rise significantly over the last few filing years. This is because of the final elimination of the marriage penalty which became permanently set into federal statutes, along with help from inflation adjustments over the last few years.
It means that today’s standard deduction is often even more appealing to a larger group of taxpayers than ever before. In those frequent cases when adding up all of the allowable expense receipts from the past year yields a smaller itemized deduction than the standard deduction amount, the best move is to simply throw them out. Why waste time filling in additional time-consuming and complicated forms to save less on taxes after all?
Yet for those individuals who do spend huge amounts of money on their mortgage interest, medical costs, local and state taxes, and charitable giving, the itemized deductions will often save more money from the dreaded tax bill.