Itemized deductions are specific expenses that the IRS allows taxpayers to deduct from their gross (total) income, before arriving at their taxable income for the year. Income tax rates are applied to taxable income, making it very important for taxpayers to find and take as many itemized deductions as they can, in an effort to reduce taxable income and therefore reduce their tax liability.
The things that are allowed to be deducted as part of the taxpayer’s itemized deductions for the year are very specific and only apply to taxpayers who actually incur those expenses. In other words, you are only allowed to take the deduction if you are the person (or married couple) that actually paid the expenses during the year.
The federal government uses itemized deductions to either incentivize a taxpayer’s behavior (such as allowing deductions for charitable contributions or home mortgage interest) or as slight reprieve from other costly expenses the taxpayer may incur throughout the course of the year, such as medical expenses, State and Local Taxes (also known as SALT) and casualty or theft losses.
A taxpayer will complete “Schedule A” as part of their 1040 tax return and sum all allowed itemized deductions for the year on Schedule A, before subtracting that number from the taxable income figure on form 1040.
For those taxpayers who do not have enough qualified expenses for the year to take their itemized deductions on their return, the IRS grants each taxpayer a “standard deduction” amount for the year as well. The standard deduction is an amount that every taxpayer is allowed to deduct from their gross income to arrive at taxable income, even if that taxpayer has no other qualifying deductions.
When filing a return for the year, taxpayers get to take the higher of either the sum of their itemized deductions, or the standard deduction before arriving at taxable income.
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