Itemized Deduction Categories

Why This Matters

Understanding itemized deductions is essential for mastering tax liability calculations and recognizing how the tax code incentivizes certain behaviors—homeownership, charitable giving, and managing catastrophic expenses. On your exam, you'll need to know not just what qualifies as a deduction, but why Congress created these categories and how the various limitations (AGI floors, caps, phase-outs) affect different taxpayers.

These deductions represent a core tension in tax policy: balancing revenue collection against social goals like encouraging homeownership and philanthropy. You're being tested on your ability to calculate deduction amounts, compare the standard deduction versus itemizing, and understand how AGI thresholds create progressive effects. Don't just memorize the categories—know what AGI floor each uses, what caps apply, and which taxpayers actually benefit from each deduction.

---

Deductions with AGI Floors

Some deductions only kick in after your expenses exceed a percentage of your adjusted gross income—this ensures only significant expenses provide tax relief.

Medical and Dental Expenses

• 7.5% AGI floor—only expenses exceeding this threshold are deductible, meaning low-to-moderate medical costs provide no tax benefit
• Qualified expenses include insurance premiums, prescriptions, medical equipment, and long-term care services (not cosmetic procedures or general health items)
• Policy rationale: targets relief toward taxpayers facing catastrophic medical costs rather than routine healthcare spending

Casualty and Theft Losses

• Federally declared disaster requirement—personal casualty losses are only deductible if caused by a presidentially declared disaster area event
• Double threshold: losses must exceed $\$100$ per event and total losses must exceed 10% of AGI before any deduction applies
• Documentation critical—police reports, insurance claims, and before/after appraisals are required to substantiate the loss amount

---

Deductions with Hard Caps

Congress imposes dollar limits on certain deductions to prevent high-income taxpayers from receiving unlimited tax benefits.

State and Local Taxes (SALT)

• $10,000 cap ($\$5,000$ if married filing separately)—this limit includes state income taxes or sales taxes, plus property taxes combined
• Election required: taxpayers must choose between deducting state income tax or state sales tax, whichever provides greater benefit
• High-tax state impact: the SALT cap significantly affects taxpayers in states like California, New York, and New Jersey where combined taxes often exceed the limit

Home Mortgage Interest

• $750,000 debt limit for mortgages originated after December 15, 2017 ($\$1,000,000$ for earlier loans)—interest on debt above this threshold isn't deductible
• Primary and second home interest qualifies, but not investment property mortgages (those go on Schedule E)
• Points deductibility: mortgage points paid at closing can be deducted either immediately or amortized over the loan term

---

Deductions Based on Contribution Type

Charitable deductions reward voluntary giving but impose limits based on what you donate and to whom.

Charitable Contributions

• 60% AGI limit for cash donations to public charities—lower limits apply for appreciated property (30%) and private foundations (30%)
• Qualified organizations only: donations must go to 501(c)(3) organizations; political contributions and gifts to individuals never qualify
• Substantiation rules: cash donations require bank records or written acknowledgment; donations over $\$250$ need contemporaneous written acknowledgment from the charity

---

Suspended Deductions (2018-2025)

The Tax Cuts and Jobs Act temporarily eliminated certain deductions—know what's currently unavailable.

Miscellaneous Itemized Deductions

• Suspended through 2025—the former 2% AGI floor category (unreimbursed employee expenses, tax prep fees, investment expenses) is not currently deductible
• Historical rule: only expenses exceeding 2% of AGI were deductible, which already limited benefit for most taxpayers
• Sunset provision: these deductions are scheduled to return in 2026 unless Congress extends the suspension

---

Quick Reference Table

---

Self-Check Questions

1. A taxpayer has $\$15,000$ in state income taxes and $\$8,000$ in property taxes. What is their maximum SALT deduction, and why does the cap exist as a policy matter?

2. Which two deduction categories use AGI floors, and how do their threshold percentages differ? Why might Congress set different floor levels?

3. Compare the limitation structure of medical expenses versus charitable contributions. Which uses a floor and which uses a ceiling, and what policy goals does each approach serve?

4. A taxpayer paid $\$500$ in tax preparation fees in 2024. Can they deduct this amount? Explain what changed and when these deductions might return.

5. If an FRQ asks you to calculate a medical expense deduction for a taxpayer with $\$80,000$ AGI and $\$9,000$ in qualified medical expenses, walk through the calculation and explain why the result might surprise taxpayers unfamiliar with the AGI floor concept.