What itemized deductions are allowed? Which deductions are included in standard deductions? Is it better to take the standard deduction or itemize? These are the important questions you may have before filing your personal income tax return. The answers depended on your tax filing status, what you have on your plate to itemize, and then a comparison with a detailed analysis of which is best for you.
In the below article we are trying to explain Standard deductions/Itemized deductions and discuss what are items that you can include under itemized deductions.
Standard deduction
On your tax return Form 1040, you can either claim itemized deductions or your standard deduction. U.S. citizens or resident aliens can claim the standard deductions, and the amount of claim is based on your filing status. If your claim for itemized deductions is more than the amount of standard deduction, you should claim itemized deductions instead of standard deductions on your US return. The standard deduction is not available to a non-resident alien unless the non-resident alien chooses to be treated as a resident alien because his/her spouse is a U.S. citizen or resident alien.
Standard deduction amount
Single or married filing separately $12,200.00
Married filing jointly or Qualifying widow $24,400.00
Head of household $18,350.00
The amount of your above standard deduction claim on your tax return increase if you are at the age 65 or above and special rules apply which limit the amount of claim if you claim for your dependent.
If you do not claim itemized deductions of Schedule A then you can claim the standard deduction on your US tax return. If you do not itemize your deductions on your US tax return you can also claim up to $300 as the charitable contribution that you have made in the tax year. You can claim an amount of standard deduction for your individual dependents. The amount of standard deduction that you can claim is the greater of $1,100.00 or the individual’s earned income plus $350.00. Your dependent’s individuals can be a qualifying child or a qualifying relative.
Itemized deductions
In summary the following items you can claim on Schedule A:
1. Unreimbursed Medical and Dental Expenses exceeding 7.5% of adjusted gross income
2. Taxes paid including sate and local income tax or sales tax, real estate and personal property taxes
3. Interest and or insurance premium You Paid on a home mortgage
4. Gifts to Charity
5. Casualty and Theft Losses
Let’s look into a little more in detail of the above items that you can report of Schedule A and can claim as an itemized deduction.
1. Medical and Dental Expenses
Paid in the tax year for yourself, your spouse, and your dependents. You can claim your medical expenses which exceed 7.5% of your adjusted gross income.
Your medical expenses include the amounts you paid for the diagnosis, cure, mitigation, treatment, prevention of disease, or the treatment of any structure or parts of your body. This may include payments to doctors, hospitals, therapists, even non-traditional medical practitioners, and the prescribed medicine.
The standard mileage rate for 2020 and 2021 is $0.17 / mile for medical-related travel is allowed.
Your medical expense does not include non-prescription medicines, cosmetics, general health improvement programs, and most cosmetic surgery.
2. Taxes paid
Taxes paid include state and local income taxes or general sales taxes. You can only claim either of the two. State and local real estate taxes paid on real property, State and local personal property taxes that you have paid on items like a boat or car.
This deduction is limited to $10,000.00 if filing jointly or $5,000.00 if married filing separately.
If you paid foreign income taxes, you either report here or claim a foreign tax credit.
3. Interest and insurance premium
Interest paid on your qualified mortgage, mortgage insurance premiums, and investment interest is limited to your investment income.
4. Gifts to Charity
Gifts by cash or cheque for $250.00 or more, and $500.00 and more to qualified organizations. Usually, you report all your charitable contributions on Schedule A – Itemized deductions. However, in 2020, individuals may deduct up to $300 from their gross income for qualified cash charitable contributions to public charities or private operating foundations or to federal, state, and local governments if they did not claim their deductions on Schedule A. The charitable contribution can also be made cash or in kind. Contributions made in kind are valued at fair market value. You must maintain and the receipts of the contributions for all your contributions over $250.00. For contributions, more than $500.00 are to be reported on form 8283. To learn more about charitable donations taxation, please visit our blog “Charity.”
5. Casualty and Theft Losses
Casualty and theft losses from a federally declared disaster. Items included in this category are theft losses relating to your home, household items, and vehicles. A casualty loss can be from events like floods, hurricanes, tornadoes, earthquakes, or fires. The amount of any insurance proceeds will reduce the loss.
You need to file an income tax return to claim either itemized deductions or standard deductions. Your US tax filing requirement is based on your gross income for the tax year. Your gross income includes the income that you have received in a tax year which is not exempt for tax purposes. This could be your employment income, scholarships, self-employment income, fees for services rendered, rental income, capital gain, interest, dividends, etc.
The followings are the threshold exceeding which you are required to file your US tax return failing which IRS charges you the penalty and if your failure to file was willful conduct then you may also be subject to criminal prosecution.
$12,400 – for Single below the age of 65
$14,050 – for Single age of 65 and above
$18,650 – for Head of household below the age of 65
$20,300 – for Head of household age of 65 and above
$24,800 – for Married filing jointly if both the spouse below the age of 65
$26,100 – for Married filing jointly if one of the spouse’s age of 65 or above
$27,400 – for Married filing jointly if both the spouse’s age of 65 or above
$24,800 – for Qualifying widow below the age of 65
$26,100 – for Qualifying widow age of 65 and above
The gross income limit is $5 for any age of individual if your filing status is married filing separately. The above gross income limits are set for the tax year 2020. You must file your US income tax if your gross income in the tax year meets the above threshold. You are also required to file a US income tax return disregarding the above threshold if you are reporting $400 or more as net earnings from your self-employment.
There are other situations in which cases although your gross income is below the above threshold, you are still required to file your US income tax return for the tax year. These situations may include when you are subject to special taxes, like Alternative minimum tax, Additional tax on a qualified plan, Social security or Medicare tax on tips which you did not report to your employer, Write-in taxes, Household employment taxes, Recapture taxes.
RKB Accounting has expertise in cross-border taxation and has been providing accounting and taxation services for the last fifteen years in Canada and USA. RKB services include incorporating a business on both sides of the border, bookkeeping, sales tax, payroll, and corporate and personal income tax. RKB’s expertise includes cross-border tax planning, long-term tax planning, helping business start-ups, business structure planning, and resolving complex tax matters. RKB a CPA(Delaware), CA(India), and CIA(USA) has over 25 years of experience in accounting and taxation in dealing with various countries in the world.
Disclaimer: Information in the blog/post/article has been presented for a broad and simple understanding. This is not legal advice. RKB Accounting & Tax Services does not accept any liability for its application in any real situations. You need to contact your accountant or us for further information.