Improved Version Available: An updated version of this article is available. Please view Itemized Deductions.Itemized deductions are sometimes limited to a certain threshold amount. And your overall total itemized deductions may be limited. Here are the limitations you need to be aware of.
Health care expenses (Schedule A, lines 1-4) are deductible only if they exceed 7.5% of your adjusted gross income (AGI). For example, if you have an adjusted gross income (Form 1040, line 37) of $30,000, then your threshold amount for medical expenses is $2,250. Only the amount of medical, dental, and other health care expenses that exceed this number can be deducted. Let's say that your total health care expenses for the year was $3,000. Your deductible amount is $3,000 minus $2,250, or $750.
Job expenses and miscellaneous deductions (Schedule A, lines 20-26) are deductible only if they exceed 2% of your adjusted gross income. For example, if you have an adjusted gross income of $30,000, then your threshold amount for miscellaneous deductions is $600. Only the amount of job-related and miscellaneous deductions that exceed this number can be deducted. Let's say your total job-related expenses for the year was $1,000. Your deductible amount is $1,000 minus $600, or $400.
Charitable donations (Schedule A, lines 15-18) are deductible only to the extent that your total contributions are less than 50% of your adjusted gross income. If you donate stocks, bonds, works of art, or other assets on which you would have paid capital gains tax, your contribution is limited to 30% of your adjusted gross income. Any excess charitable contributions may be carried over to next year's tax return (and if not used up next year, may be carried forward for a total of five years).
For example, Mary has an adjusted gross income of $30,000. Her charitable donations of up to $15,000 in cash or up to $9,000 in stocks, bonds, or works of art, are fully deductible. Let's say that Mary donates $10,000 in appreciated stocks to her church. Mary takes a tax deduction of $9,000 on her tax return, and carries forward the remaining $1,000 to next year's return. Mary has not only increased her itemized deductions, but she has also avoided any capital gains tax on the stocks, so she has reduced her taxes twice in one generous donation.
Casualty and theft losses (Schedule A, line 19) are limited by an $100 threshold per loss event and an overall threshold of 10% of your adjusted gross income. To phrase this another way, your casualty loss is deductible to the extent that it exceeds $100 per loss event, and to the extent that it exceeds 10% of your AGI.
For example, John suffered two losses last year: his uninsured laptop computer was stolen, and later an earthquake caused damage to his home. Each event is subject to a separate $100 limitation. Let's say his stolen laptop was worth $1,500, then applying the $100 limitation, we have a loss of $1,400. Similarly for the damage to his home. Now, John's total casualty and theft losses, when added up, are reduced by 10% of his adjusted gross income. Let's say the damage to his home reduced his property value by $10,000, and John has an adjusted gross income of $30,000. The calculations would go like this:
- Event 1 Stolen computer ($1,500 - $100) = $1,400
- Event 2 Damaged house ($10,000 - $100) = $9,900
- Total Losses ($1,400 + $9,900) = $11,300
- 10% Threshold ($30,000 AGI x 10%) = $3,000
- Deductible Losses ($11,300 - $3,000) = $8,300
Overall limitation on itemized deductions
The overall dollar limitation on itemized deductions (the so-called Pease limitations) have been temporarily repealed for 2010, 2011 and 2012. The Pease limitations will resurface for the year 2013 unless new legislation is enacted.