Schedule A: Lower Your Tax Bill with Itemized Deductions

Schedule A: Lower Your Tax Bill with Itemized Deductions

When filing your Form 1040, you have the option to take a standard deduction or to itemize your deductions using Schedule A. While the standard deduction offers a straightforward way to reduce your taxable income, itemizing can sometimes result in even greater tax savings. Schedule A allows you to list and claim deductions for various qualifying expenses, such as medical costs, mortgage interest, property taxes, and charitable contributions.

In this guide, we will take a closer look at Schedule A, explain which expenses you can itemize, and help you determine whether itemizing or taking the standard deduction is best for you.

What is Schedule A?

Schedule A is an attachment to Form 1040 that allows taxpayers to report itemized deductions instead of using the standard deduction. By itemizing, you list specific expenses that the IRS allows you to deduct, potentially reducing your taxable income more than the standard deduction would. However, this approach requires keeping detailed records and completing the schedule correctly.

Schedule A is divided into several sections based on the type of expense you’re deducting, such as medical expenses, state and local taxes, mortgage interest, and charitable contributions. At the end of the form, you total your deductions, and the result is subtracted from your adjusted gross income (AGI) to determine your taxable income.

Why Itemize Deductions?

The key reason to itemize deductions is that doing so can potentially result in a larger deduction than the standard deduction. For tax year 2023, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly. If your total itemized deductions exceed these amounts, itemizing could save you more money on your taxes.

However, itemizing is not right for everyone. If your total deductions are less than the standard deduction for your filing status, you would be better off taking the standard deduction.

What Can You Deduct on Schedule A?

Schedule A is broken down into five main sections, each covering a different category of itemized deductions. Let’s explore each section in more detail:

1. Medical and Dental Expenses (Line 1)

You can deduct medical and dental expenses that exceed 7.5% of your adjusted gross income (AGI). This means if your AGI is $50,000, you can only deduct medical expenses that exceed $3,750.

Eligible medical and dental expenses include:

• Doctor and dentist fees
• Hospital stays
• Prescription medications
• Health insurance premiums (if paid out of pocket)
• Long-term care services

Note that only out-of-pocket medical expenses qualify. If your insurance covers the costs, you can’t deduct those amounts.

2. Taxes You Paid (Line 5a-5d)

You can deduct several types of state and local taxes, but the Tax Cuts and Jobs Act (TCJA) of 2017 limited the amount of state and local taxes you can deduct. The SALT deduction is capped at $10,000 ($5,000 if married filing separately).

Eligible taxes include:

• State and local income taxes or sales taxes (you can choose to deduct either income or sales taxes, whichever is higher)
• Property taxes (on real estate and personal property)
• Foreign income taxes (if applicable)

If you paid these taxes during the year, you can deduct them on Line 5 of Schedule A, but keep in mind that the SALT cap limits how much you can claim.

3. Interest You Paid (Line 8)

Interest paid on certain loans and debts can also be deducted on Schedule A, including:

• Mortgage interest on your primary home and any second home. This deduction applies to loans up to $750,000 for mortgages taken out after December 15, 2017 ($1 million for mortgages taken out before that date).
• Home equity loan interest, if the loan was used to buy, build, or improve your home.
• Investment interest (interest on money borrowed to buy taxable investments).

For most taxpayers, mortgage interest is the most common deduction in this section. You’ll need to receive a Form 1098 from your mortgage lender to report the interest you’ve paid.

4. Gifts to Charity (Line 11)

Charitable donations to qualified organizations are fully deductible, provided you have the proper documentation. In 2023, you can generally deduct cash donations up to 60% of your AGI. Other types of donations, like property or appreciated assets, may have different limits.

Examples of deductible charitable contributions include:

• Cash donations to qualified organizations
• Donated property, including clothing or household items
• Donations of stocks or other appreciated assets

You’ll need to keep records, such as receipts, bank statements, or acknowledgement letters from the charity, for any donations you claim.

5. Casualty and Theft Losses (Line 20)

You can deduct losses from damage to your property due to a disaster, like a fire, flood, or theft, but only if the loss is not reimbursed by insurance. The IRS requires that the event be declared a federally declared disaster for the loss to be deductible.

To calculate the loss, you must reduce the total loss amount by any insurance reimbursement and by $100 per casualty or theft event. You must also meet a threshold of 10% of your AGI for the loss to be deductible.

How to Fill Out Schedule A

1. List all qualifying expenses: As you review the categories above, begin by listing your deductible expenses in the appropriate sections of Schedule A. Be thorough and ensure that all eligible expenses are included.

2. Total the amounts: Add up the deductions from each section and enter the total on the last line of Schedule A.

3. Transfer the total to Form 1040: Once you’ve calculated your total itemized deductions, transfer the amount to Line 12 of Form 1040. This total will reduce your taxable income, resulting in a lower overall tax bill.

Should You Itemize or Take the Standard Deduction?

If you want to determine whether you should itemize or take the standard deduction, you’ll need to compare your total itemized deductions with the standard deduction for your filing status.

For 2023, the standard deduction amounts are:

• $13,850 for single filers
• $27,700 for married couples filing jointly
• $20,800 for heads of household

If your total itemized deductions exceed the standard deduction for your filing status, then itemizing could be the right choice. However, if your itemized deductions are less than the standard deduction, it’s generally better to claim the standard deduction and avoid the extra paperwork associated with itemizing.

Tips for Maximizing Your Itemized Deductions

1. Keep detailed records: Save all receipts, statements, and forms that substantiate your deductions, including medical expenses, charitable donations, and mortgage interest payments.

2. Track donations: If you donate to charity, keep records of every donation, including the amount, date, and name of the organization. This will be critical in substantiating your deductions.

3. Plan for big deductions: If you’re close to the threshold for itemizing, consider bunching your deductions. For example, you might prepay property taxes or make larger charitable donations in one year to push your deductions above the standard deduction threshold.

Conclusion

Schedule A allows you to claim valuable itemized deductions that can significantly reduce your taxable income. Whether it’s through medical expenses, mortgage interest, charitable contributions, or state and local taxes, itemizing can result in tax savings that exceed the standard deduction. However, it’s essential to keep accurate records, track your expenses, and carefully compare your itemized deductions to the standard deduction to ensure you’re making the best choice for your financial situation.