The IRS has identified dozens of different types of expenses that you can claim as itemized deductions. And if you're the kind of person who enjoys reading poorly translated instruction manuals, check out the full IRS.gov entry on itemized deductions. Otherwise, here are some of the most common itemized deductions claimed by American taxpayers [source: IRS]:
Mortgage interest: The mortgage interest deduction makes home ownership more affordable for millions of Americans. If you buy a home using a traditional 30-year mortgage, the majority of each monthly mortgage payment – at least for the first 15 years – is pure interest on that loan. This generous deduction lets you subtract all of that mortgage interest from your taxable income. You can also deduct premiums paid for mortgage insurance.
State and local taxes: Federal taxes are not the only taxes you pay each year. Most folks pay state and local income taxes, plus local property taxes. Since all of those taxes come out of your gross income, it seems only fair to subtract those totals from your taxable income when calculating federal taxes. Note that you can choose to deduct the amount you paid in state and local sales taxes instead of income taxes. This is particularly useful if you live in a state without state and local income taxes (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming) or you made a large purchase (car, boat, plane) for which you paid a lot of sales tax.
Charitable gifts and donations: You are allowed to deduct the cash value of any gift you made during the tax year to a qualified charitable institution. Gifts can be made in the form of cash donations, property, stocks or anything of real value. Charitable institutions are tax-exempt organizations that include most churches, synagogues and mosques; most nonprofit community organizations like the Boy Scouts, Girl Scouts and Goodwill; most nonprofit colleges and universities; and nonprofit hospitals. For gifts worth $250 or more, you will need a statement from the organization. Note that you can even deduct certain expenses incurred when volunteering for a nonprofit organization. Charitable donations are subjects to limits, which we'll talk about on the next page.
Medical and dental expenses: You can deduct out-of-pocket medical and dental expenses, but only the amount that exceeds 10 percent of your adjusted gross income (7.5 percent if you or your spouse is over 65). So if your AGI is $50,000, you can only deduct the expenses that exceed $5,000. If you spent $6,000 on doctor's visits, hospital stays and prescriptions, you can deduct $1,000. You cannot deduct health insurance premiums that were withheld from your paycheck using pretax dollars, but other out-of-pocket premiums are deductible.
Again, these are only the most common deductions. Others include unreimbursed job expenses, theft and casualty losses, tax preparation fees and gambling losses. But before you attempt to write off your entire life, read on to learn about the limits on itemized deductions.