The first step in deciding whether to take itemized or standard deductions with the IRS is to determine which method of deductions will result in the largest tax break for a taxpayer. Taxpayers that are ineligible to claim a standard deduction include the following types of taxpayers: a person that is married filing separately with one spouse itemizing deductions, a nonresident or a dual-status alien, or if the tax return being submitted is less than 12 months. IRS Publication 501 (Exemptions, Standard Deduction, and Filing Information) helps guide taxpayers through the process of itemizing deductions.
The following items may be itemized on an IRS Form Schedule A:
- Medical/Dental Expenses
- Job/Business Expenses
- Donations/Charity Contributions
- Mortgage Interest
- Investment Interest
- Real Estate/Property Tax
- Income/Sales Tax
- Uninsured Casualty/Theft Losses
- Details for what can be itemized for each tax year is available on IRS Instructions for Schedule A (Form 1040)
Itemized deductions may not be taken by a taxpayer if they claim the standard deduction amount from the IRS. After an individual itemizes all of their deductions on IRS Form Schedule A, they can subtract that amount for their adjusted gross income (AGI) to determine their taxable income. Taxable Income is the income an individual makes minus deductions that the IRS will impose tax upon.
Itemizing deductions may seem like the logical choice if a taxpayer has a considerable amount of deductions, but may cause problems if incorrectly calculated or claimed. If a person claims too many deductions, tries to claim deductions that they are not eligible to receive, or does not have substantial records for the deductions, the IRS may reject the deduction. Rejection of a deduction can result in tax penalties and tax debt and the taxpayer may receive a bill for the difference in amount owed to the IRS. If the IRS determines that a taxpayer purposefully took deductions or credits, the individual may face criminal charges. Taxpayers who are unsure of whether they should file an itemized or standard deduction or have received notice from the IRS of a problem, may want to consult a tax preparation or tax negotiation service for advice.