Taxpayers are permitted to deduct either a standard deduction or itemized deductions in determining their taxable income. Itemized deductions are in five basic categories:
- Medical expenses that exceed 10% (7.5% if age 65 or older through 2016) of the AGI.
- Taxes – state income tax, property taxes, personal property taxes.
- Interest – generally limited to home mortgage interest and investment interest.
- Charitable contributions not exceeding an AGI limitation. That limitation is 50% for most contributions but there are contributions limited to 20% and 30% of the AGI.
- Miscellaneous expenses – only miscellaneous expenses that exceed 2% of the AGI are generally allowed. However, there is a second category that includes gambling losses (cannot exceed reported gambling winnings) and several other rarely encountered deductions that are allowed without an AGI reduction.
In 2017, for higher income taxpayers, some of the itemized deductions may be further reduced by 3% of the amount that the AGI exceeds a phase-out threshold but not more than 80% of the total of those deductions affected by this limitation. The 2017 phase-out thresholds are $261,500 (up from $259,400 in 2016) for single taxpayers, $287,650 (up from $285,350 in 2016) for taxpayers filing as head of household, $313,800 (up from $311,300 in 2016) for married taxpayers filing jointly, and $156,900 (up from $155,650 in 2016) for married taxpayers filing separately.