The Federal Tax Itemized Deductions Disadvantage

What is the federal tax itemized deductions disadvantage?

Itemizing deductions is the least preferred method of tax deductions. Here are some examples of how the IRS makes it quite difficult to enjoy this deduction.

  1. Everybody is entitled to a personal tax deduction on their tax return either standard or itemized, but not both. Therefore it only pays to itemize deductions if the total itemized deductions are more than the standard deduction.

    The first dollars of the expenses that you itemize is not really counted because you can anyway get it with the standard deduction.

    When you are itemizing you are effectively giving up your standard deduction.

    So if you’re married filing jointly and your federal tax itemized deductions add up to $20,000- you are really getting less than $8000- because the first $12,400- you would have gotten anyway with the standard deduction.

  2. Another drawback is that some of the expenses that you will try to deduct are limited. For example 10% of your income needs to be spent for medical expenses before you can begin deducting the remainder of your medical expenses. This strongly limits the amount of your itemized deductions.
  3. Also the deductions claimed as federal tax itemized deductions only reduce your income tax unlike expenses deducted as business expenses which also reduces your self-employed tax.

Please note: Some people must itemize even if they don't want to. For example if your spouse itemizes on a separate return or you were a dual-status alien.

So should you itemize or not?

You should definitely itemize your deductions if you can, but it usually pays to look out if you can deduct the same deduction elsewhere especially if you are also self-employed.

Here are some examples:

  • If you have mortgage interest expense see if you are eligible for the mortgage tax credit . This will allow you to deduct the full amount of interest eligible for this credit instead of only reducing the taxable amount. Whatever amount of mortgage interest cannot be used for this credit you can still deduct as a federal tax itemized deduction.
  • Another place to use your mortgage interest is by the home office expense where you can deduct the mortgage interest percentage-wise to your home office. Here you will get to deduct both the income tax and the self-employed tax for this portion of your mortgage interest. The balance of the mortgage interest you can deduct on your Schedule A if you itemize deductions.
  • Use the self-employed health insurance deduction. You will be able to deduct your health insurance if you are self-employed even if you don't itemize.

    With the self-employed health insurance deduction you will not be limited to how much you can deduct like by the itemized deductions which have a minimum that you have to pay before you can deduct the health insurance (and other medical expenses.)

Updated January 27, 2015

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