Last week's column focused on medical expenses, especially for senior taxpayers, that are deductible and may well make a better tax result for those seniors to itemize their deductions instead of taking the standard deduction. Many senior taxpayers claim the standard deduction on their annual income tax return instead of itemizing deductions. If they have significant medical expenses, they should consider itemizing.
After identifying and adding up all available medical expenses and subtracting 7.5% of Adjusted Gross Income (AGI), the next step is to add other itemized deductions from the following categories:
Taxes that you paid
You can deduct from federal income tax state and local income taxes or state and local sales taxes, but only if you chose to claim sales taxes instead of claiming state and local income taxes. If you choose to deduct sales tax you can use either your actual expenses or the state and local sales tax tables to figure your sales tax deduction.
You can deduct real estate (property) taxes, and personal property taxes. Vehicle registration fees are deductible only to the extent they are based on the value of the vehicle. Flat registration fees, such as those in Pennsylvania, are not deductible.
Interest that you paid
Home mortgage interest is deductible. Home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan.
If you borrow money to buy property you hold for investment, the interest you pay is investment interest. Margin interest is an example. You cannot deduct interest you incurred to produce tax-exempt income. Generally, your deduction for investment interest expense is limited to the amount of your net investment income.
Gifts to charity
A charitable contribution is a donation or gift to, or for the use of, a qualified organization. It is voluntary and is made without getting, or expecting to get, anything of equal value. In order for the contribution to be deductible the recipient organization must be qualified to receive deductible charitable contributions.
Subject to limitations on total charitable deductions compared to AGI, cash contributions to charities and churches and the fair market value of non-cash contributions to charities and churches are deductible. There are rules on what records must be kept and what supporting documentation must be obtained.
Casualty and theft losses
A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Deductible casualty losses can result from a number of different causes, including automobile accidents, earthquakes, fires, floods, storms, hurricanes, tornadoes and vandalism.
A theft is the taking and removing of money or property with the intent to deprive the owner of it. The taking of property must be illegal under the laws of the state where it occurred, and it must have been done with criminal intent. The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law. Theft includes the taking of money or property by blackmail, burglary, embezzlement and robbery. You do not need to show a conviction for theft.
Job expense and other miscellaneous deductions.
Job-related expenses that your employer did not reimburse you for, union dues, cost of purchasing or cleaning uniforms, job-related education and professional development, job-related travel, home office expenses, tax preparation fees, investment fees and expenses (such as IRA custodial fees and annual brokerage fees), safe deposit box fees, gambling losses (only to the extent of gambling winnings) are deductible.
Can you itemize deductions?
Add the deductions listed above to your medical expense deduction, and see if the total exceeds your 2012 standard deduction amount of:
$7,400 if you are unmarried and will be 65 or older as of 12/31/12
$14,200 if you file jointly, and both you and your spouse will be 65 or older as of 12/31/12 ($13,050 if only one of you will be that old)
$10,150 if you use head-of-household filing status and will be 65 or older as of 12/31/12
If your total itemized deductions exceed your standard deduction amount, you should file Schedule A of Form 1040 and claim your itemized deductions.
If you find that you could have itemized in prior years and didn't, you can amend three years of prior returns.