What is an Itemized Deduction?

An itemized deduction is a deduction from a taxpayer's adjusted gross income that limits overall tax liability. The amount of the deduction is determined by listing eligible expenses incurred over the course of the year. The alternative to taking itemized deductions is taking a standardized deduction, a set amount based on filing status. Taxpayers can determine which option would result in the lowest tax liability in a given year.

Expenses eligible for itemized deductions include medical expenses, state and local taxes, contributions to charities, expenses due to theft and loss, and mortgage interest. There is also a miscellaneous category for things like fees paid to tax preparers and work-related expenses such as union dues and uniform purchases. All of these deductions must be listed and the taxpayer needs documentation to back up each claim in the form of receipts, invoices, and other documents proving that the claimed amount was paid.

For people who incur high expenses over the course of the year, the total of the itemized deductions is usually higher than the standard deduction. These individuals would take an itemized deduction to cut down on their tax liability and pay less in taxes. Other people may have relatively low expenses and opt for the standardized deduction because it will reduce their adjusted gross income by a greater amount. Both deductions are designed to offset tax liability by taking the costs of living into account.

Taxpayers who think that they may take an itemized deduction should keep their proofs of payment and organize them in a way that makes sense to them so that they will be easy to go through at the end of the year when it is time to file taxes. For people who use accounting software, this process can be very easy. This software is often designed to allow people to place expenses into different categories, and will add up expenses at the end of the year to generate totals for itemized deductions.

There are some limits and rules for taking an itemized deduction. A longer tax form is required and the form discusses the limitations involved. People who are not sure about whether something is eligible may want to consult a tax preparer to get information about the current tax year. It is also important to be aware that tax authorities may decide to adjust the deduction when reviewing a tax return. If the itemized deduction and the standard deduction are very close, using the shorter form and taking a standard deduction will reduce paperwork and limit the chances that the IRS will make an adjustment.