Key Tax Deductions to Itemize for Maximum Savings

Tax season offers a chance to boost savings through strategic itemization. By selecting the right deductions, taxpayers can lower their taxable income and potentially increase their refund or reduce the amount owed.

Understanding key tax deductions is essential for informed financial decisions. This article will explore several deductions individuals should consider for maximum tax savings.

Medical and Dental Expenses

Deductions for medical and dental expenses can be a valuable strategy for tax savings. Under IRC Section 213, individuals can deduct qualified expenses exceeding 7.5% of their adjusted gross income (AGI). Qualified expenses include costs for diagnosis, treatment, or prevention of disease, and payments for treatments affecting body functions. Cosmetic procedures generally do not qualify.

To maximize this deduction, taxpayers should document eligible expenses, such as doctor visits, prescription medications, medical equipment, and travel costs related to medical care. For instance, travel over 50 miles for treatment may allow deduction of transportation costs, including mileage at the IRS standard rate. Out-of-pocket premiums for medical insurance, including Medicare, may also qualify.

State and Local Taxes

State and local taxes (SALT) significantly affect taxpayers, especially in high-tax regions. The Tax Cuts and Jobs Act (TCJA) of 2017 capped the SALT deduction at $10,000 ($5,000 for married filing separately). Taxpayers should evaluate their state and local tax liabilities, including income, sales, and property taxes, to plan deductions effectively.

The SALT deduction covers state and local income taxes, sales taxes, and real estate taxes. Taxpayers must choose between deducting income taxes or sales taxes, based on spending patterns and state tax structures. Residents in states without an income tax, like Texas or Florida, may benefit from itemizing sales tax deductions. The IRS’s sales tax deduction calculator can help estimate the deductible amount.

Property taxes are another component of the SALT deduction. Homeowners should keep records of property tax payments. However, the TCJA’s cap may limit deductions in high-tax areas. Taxpayers in states like New York or California might consider strategies such as pre-paying taxes or exploring state-specific tax credits.

Mortgage Interest and Points

Understanding mortgage interest and points is crucial for homeowners’ tax planning. The TCJA limits the mortgage interest deduction to interest on up to $750,000 of indebtedness for loans after December 15, 2017. For earlier loans, the limit is $1 million. Knowing the mortgage date is essential, as it affects the deductible amount.

Points, or prepaid interest, can be deducted in the year paid if certain criteria are met. The loan must be secured by the primary residence, and points must align with local business practices. Otherwise, points must be amortized over the loan’s life. Immediate deduction can provide short-term benefits, while amortization may suit long-term planning.

The impact of mortgage interest and points also depends on filing status and loan structure. Co-borrowers must coordinate deductions to reflect actual interest paid. Taxpayers who refinance may deduct remaining points from the original mortgage. Record-keeping and understanding loan terms are critical.

Charitable Contributions

Charitable contributions allow taxpayers to support causes while gaining tax benefits. IRC Section 170 governs these deductions, allowing contributions to qualified organizations. Cash contributions can be deducted up to 60% of AGI, while donations of appreciated assets like stocks are limited to 30% of AGI.

Taxpayers must verify that recipient organizations are tax-exempt under IRC Section 501(c)(3). Contributions to non-qualifying organizations are not deductible. Detailed records, including receipts and acknowledgment letters for donations over $250, are necessary for audit purposes. Donating appreciated assets can avoid capital gains taxes while securing a deduction.

Casualty and Theft Losses

Casualty and theft losses refer to damage, destruction, or loss of property from unexpected events like natural disasters or theft. Taxpayers can claim deductions under IRC Section 165, but proper documentation and understanding specific criteria are necessary.

For casualty losses, the IRS allows deductions for uninsured damage to personal property. Taxpayers must reduce the total loss by $100 per event and deduct the portion exceeding 10% of their AGI. For instance, uninsured hurricane damage to a home can be deducted after reductions. Documentation, including photographs and repair estimates, is vital. After the TCJA, casualty loss deductions are mainly limited to federally declared disaster areas.

Theft losses require proof of illegal taking with criminal intent, such as burglary. The deduction is subject to the same $100 reduction and 10% AGI threshold. Taxpayers must file a police report and provide documentation of the stolen property’s fair market value and insurance claims. The deduction applies only to the year the theft is discovered.

Investment Interest and Expenses

Investment interest and expenses allow taxpayers to manage taxable income through financial planning. The deduction for investment interest is limited to net investment income, including interest, dividends, and short-term capital gains.

Investment interest expense, under IRC Section 163, applies to interest on loans for taxable investments. This expense can be deducted up to net investment income, with excess carried forward. Taxpayers should keep records of interest payments and ensure borrowed funds were used for investments. This deduction benefits those in margin trading, where interest on margin loans accumulates quickly.

Investment expenses, previously deductible as miscellaneous itemized deductions, were suspended by the TCJA until 2025. These expenses include management fees and subscriptions to financial publications. While currently nondeductible, taxpayers should track these costs for potential future relevance. Understanding the current landscape helps anticipate changes and adjust financial strategies.