The Internal Revenue Service gives you the choice between taking the standard deduction or itemizing your deductions when you file your federal income tax return. Most taxpayers choose the standard deduction because it is easier to figure and usually results in a lower tax obligation, but if you pay mortgage interest or have significant medical bills or other deductible expenses you might want to figure your taxes using both methods to determine which method is best for you.
Medical and Dental Expenses
Taxpayers may deduct medical and dental expenses that exceeded 7.5 percent of their adjusted gross income in the tax year for which they are filing a return. The threshold goes up to 10 percent after Dec. 31, 2012. You may combine medical and dental expenses incurred for yourself and your spouse -- if you file a joint return -- and for your dependents.
You may deduct certain taxes, including real estate taxes, personal property taxes, state and local income taxes and state and local sales taxes. To qualify as a deduction, the taxes must have been imposed on you and you must have actually paid the taxes during the tax year. Money that you paid into an escrow account to your mortgage company for property taxes that have not actually been paid to the taxing authority may not be deducted. You may not deduct federal income taxes, Social Security taxes, Medicare taxes or real estate transfer taxes.
The interest on your home mortgage is deductible when you file your federal income tax return. You may also deduct interest on a loan secured by a second home. The mortgage interest deduction applies regardless of whether your home is a single-family dwelling, a condo, a cooperative apartment, a mobile home or even a houseboat -- if it has sleeping quarters, cooking facilities and a toilet. You usually may include points you paid to obtain your mortgage as deductible interest, and you may deduct the interest on home equity loans.
If you put down less than 20 percent when you bought your home, your lender probably required you to carry mortgage insurance. This is an insurance policy that protects the lender in the event you default on your mortgage. It should not be confused with homeowners insurance, which protects you against loss in the event of damage to your home due to fire or a natural disaster, such as a tornado or earthquake. Homeowners insurance is not deductible, but you may deduct amounts you paid for mortgage insurance.
You may deduct contributions you made to qualifying organizations -- those of a religious, charitable, scientific, literary or educational nature. Organizations involved in the prevention of cruelty toward children or animals may also qualify.
You may deduct losses to your home, vehicles and household items due to theft or natural disaster, such as a fire or earthquake, provided the loss was not covered by insurance. You may not deduct losses due to ordinary wear and tear from time or use.
Employee Business Expenses
You may deduct expenses associated with your job that were not reimbursed by your employer. Deductible expenses include business use of your car -- excluding mileage to commute to and from your normal place of business. You may deduct expenses associated with the business use of your home if you used a portion of your home regularly and exclusively for business. You may deduct certain travel and entertainment expenses. Your employee business expense deduction is limited to the amount that exceeds 2 percent of your adjusted gross income.
- Internal Revenue Service: Topic 502 - Medical and Dental Expenses
- Internal Revenue Service: Topic 503 - Deductible Taxes
- Internal Revenue Service: Topic 505 - Interest Expense
- Internal Revenue Service: Topic 509 - Business Use of Home
- Internal Revenue Service: Topic 506 - Charitable Contributions
- Internal Revenue Service: Topic 515 - Casualty, Disaster, and Theft Losses
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.