Above the Line, Under the Figure

I want to state a disclaimer. This post is only to give my honest and thorough blanketed knowledge about itemized deductions. To understand your own personal situation a bit more in-depth, please consult your personal financial professional.

What is an itemized deduction? An itemized deduction is what's known as an "above-the-line" item. A taxpayer, when filing his or her personal income taxes is entitled to take one of 2 deductions regarding their adjusted gross income: The Standard Deduction or the aggregate of their Itemized Deductions. We're going to talk about Itemized Deductions, because Standard Deductions and the process regarding them are pretty basic: You apply the blanketed, standard deduction amount based on your filing status to aid in arriving at your taxable income.

An itemized deduction is a bit more than that. However, because of Title II and Title V pursuant to the Tax Cut and Jobs Act, most average-income taxpayers will probably not be itemizing, as the standard deduction has substantially increased for some filing statuses. Itemized deductions are analyzing each qualified deduction one by one and applying them to the taxpayer's adjusted gross income.

Examples of itemized deductions (and what are not deductions in general) can be found in Section 162 and Section 262 of the Internal Revenue Code. However, a partial list is:

• Alimony (divorce decrees before 2019)

• Expenses attributable to management of property held for rents or royalties

• Expenses attributable to trade and/or business

• Reimbursed employee business expenses

• Qualified education supplies for educators (up to $250 or $500 for married educators, given both spouses are qualified educators, filing jointly)

• Student loan interests

• Contributions to retirement plans (IRA's, etc...post-tax contributed annuities do not qualify, as their objectives are tax-sheltered)

• Medical insurance premiums for self-employed taxpayers

• Self-employment taxes

• Loss on sales or exchanges of property

• Penalties on premature withdrawals from retirement savings accounts

• State and local taxes

• Personal property tax

Basically, these are examples of deductions that a taxpayer must itemize in order to benefit from. There are some deductions that have contingencies attached to them, such as:

• Unreimbursed medical expenses - Deductible up to 10% of the taxpayer's AGI

• Charitable contributions - Limited to deductions only up to 50% of the taxpayer's AGI

• Casualty/theft losses - Deductible up to 5% of the taxpayer's AGI

• Miscellaneous itemized deductions - Deductible up to 2% of the taxpayer's AGI - Bear in mind that Miscellaneous Itemized Deductions are suspended under policies pursuant to the TCJA, from 2018 - 2025.

Parameters such as these are set in place with these deductions to minimize taxpayer fraud and corruption.

All itemized deductions are to be delineated on the Schedule A of the Form 1040.

When someone mentions deductions such as itemized deductions, understanding it can make the sound of it a bit less intimidating. Yes, itemized deductions means they're itemized. But why are they itemized? Knowing this can also drastically help you to improve your knowledge at tax time.