Limits on Itemized Deductions
Here's where itemizing deductions gets a little tricky and where a qualified tax preparer or accountant becomes essential. Congress has generously created many categories of itemized deductions, but there are limits on that generosity. Those limits come in the form of floors, ceilings and phase-outs.
Floors set a minimum amount at which you can start to deduct and ceilings put a cap on how much you can deduct in certain categories.
Common deduction floors:
- As we mentioned earlier, you can only deduct medical and dental expenses that exceed 10 percent of adjusted gross income (AGI).
- There are several miscellaneous deductions that used to fall under the 2 percent rule, meaning you could only deduct the amount within each category that exceeds 2 percent of AGI. Examples included job expenses, tax preparation fees and safety deposit box rentals [source: Sit]. The new tax laws have phased these out for tax years 2018-2025. However, self-employed people can still deduct business expenses via Schedule C [source: TurboTax].
Common deduction ceilings:
- Your total deductions for charitable contributions cannot exceed 50 percent of AGI.
- You can only deduct 50 percent of business-related meal expenses. Expenses incurred in entertaining clients (for instance tickets to a show) can no longer be deducted. If the entertainment for the evening is dinner and a show, they must be purchased separately, otherwise the meal cannot be partially deducted [source: Hertzbach].
- If claiming gambling losses, they cannot exceed your winnings. In other words, you can't gamble away your taxable income at the craps table. However "gambling losses" can now include things such as travel expenses to the casino.
The flip side of the elimination of some of these deductions is that itemized deductions are no longer phased out (gradually decreased) when Adjusted Gross Income is above certain thresholds, (for instance it used to start phasing out at $313,800 for married filing jointly, and $261,500 for single filers.)
Despite the potential tax savings, relatively few Americans itemize their deductions. Read on to find out who does and why.