Understand the Deductions

• 1). Certain deductions on Schedule A have thresholds that need to be met. Adjusted gross income is found on line 37 of your Form 1040. It represents the total of your wages, interest income, dividend income, Schedule C income, capital gains on sale of stock, pensions, annuities, Individual Retirement Account withdrawals, Social Security payments, and other income items after deducting items such as one-half of self-employment tax, student loan interest, and alimony paid. The thresholds for Schedule A are calculated as percentages of adjusted gross income.
  
  
• 2). With the increasing cost of health insurance and medical costs, medical expenses are common. However, you can only deduct medical expenses greater than 7.5% of your adjusted gross income. Additionally, do not assume that all medical-related expenses can be deducted. To avoid problems later on, consult IRS Publication 502, which is list of medical expenses the IRS allows to be deducted from income tax liability.
  
  
• 3). Charitable contributions is an area of itemized deductions that presents problems for many taxpayers. It is again important to remember that documentation is essential to avoiding a problem with the IRS down the road. For gifts made by cash or check a receipt from the charity or canceled check is adequate documentation. For non-cash gifts, including clothing and household items, prepare a list of the items donated, the date they were donated, and the charity you donated them to for your records. The amount deducted on Schedule A is not the price you paid for the item. Rather, it is the fair market value of the item on the date the gift was made. Do not forget to include any charitable contributions that are deducted from your paycheck. The annual deduction may not be shown on your W-2 form, so retain a copy of your last pay stub to support the deduction. Charitable contributions greater than $250 require a written acknowledgement from the charity before they can be listed as deductions on Schedule A.
  
  
• 4). Job expenses and certain miscellaneous deductions on Schedule A are another area subject to thresholds. Itemized deductions in this category include unreimbursed job expenses, tax preparation fees, safety deposit box rentals, and investment advisor fees. Deductions not included in this category are student loan interest, educator expenses of $250, and costs associated with moving to a new city for a new job. Unreimbursed job expenses include malpractice liability premiums, continuing education costs, union dues, uniform costs, and travel expenses. A daily travel log and receipts for expenses are important documentation for this category. You can deduct expenses in this category that are more than 2.0% of your adjusted gross income. IRS Publication 529 contains a comprehensive list of miscellaneous deductions allowed.