Individual and itemized deductions

Traditional IRA and itemized deductions

Traditional IRA contribution deduction

There are no income limitations on contributing to a nondeductible traditional IRA. The maximum contribution to a traditional IRA for tax year 2025 is $7,000 ($8,000 if you’re age 50 or over). A taxpayer can choose to contribute to a deductible or a nondeductible traditional IRA, but total contributions - deductible and nondeductible combined - are limited to the taxpayer’s taxable compensation for the year. Taxpayers can contribute at any age, as long as they have compensation. Whether you can deduct the contribution depends on whether you (or your spouse) are an active participant in an employer-sponsored retirement plan. Note that the traditional IRA contribution deduction is an adjustment to income (an “above-the-line” deduction, not claimed on Schedule A) - it’s covered here because it’s one of the most common deductions taxpayers claim alongside their itemized deductions. For details, consult IRS Publication 590-A: Contributions to Individual Retirement Arrangements.

Definitions

Traditional IRA

An Individual Retirement Account that allows eligible taxpayers to make pre-tax contributions that may be tax-deductible, depending on income and participation in an employer-sponsored retirement plan. Earnings grow tax-deferred until withdrawal, at which point distributions are taxed as ordinary income.

Deductible vs. nondeductible IRA contribution

A deductible IRA contribution reduces taxable income in the year it is made. A nondeductible contribution does not reduce taxable income but still allows tax-deferred growth; the after-tax basis is tracked using Form 8606 to avoid double taxation upon withdrawal.

Excess contributions. An excess contribution is the amount contributed to a traditional IRA for the year above the smaller of $7,000 ($8,000 if age 50 or older) or taxable compensation. A 6% excise tax applies to the excess for each year it remains in the IRA at the end of the year, figured on Form 5329; the tax can’t exceed 6% of the value of all the taxpayer’s IRAs at year-end. Excess Roth IRA contributions are subject to the same 6% tax. To avoid the tax, the taxpayer withdraws the excess and the earnings on it by the due date of the return, including extensions (or within 6 months after the original due date if the return was filed on time). The withdrawn contribution isn’t taxed if no deduction was taken for it, but the earnings are income for the year the contribution was made. An excess left in the account can instead be absorbed by contributing less than the limit in a later year, with the 6% tax owed for each year until then.

Itemized deductions - Schedule A

Medical expenses

Expenses incurred to prevent or treat a physical or mental illness are deductible on Schedule A (Form 1040) to the extent they exceed 7.5% of the taxpayer’s adjusted gross income. Deductible expenses include cost of medical insurance premiums, insurance co-payments paid by taxpayer, medical services rendered by physicians, dentists, surgeons, chiropractors, psychologists, therapists, public or private transportation fare, personal car mileage (21¢ a mile for 2025) to and from doctor’s appointments. Nondeductible medical expenses include but are not limited to over-the-counter medicines, health club dues, nutritional supplements, prepaid medical care payments, controlled substances i.e., marijuana, peyote, heroin, LSD, and foreign medicines and drug purchases. Cosmetic surgery done only to improve appearance (a face-lift, hair transplant, or liposuction) isn’t deductible, but surgery that corrects a deformity from a birth defect, injury, or disfiguring disease is, as is laser eye surgery to correct vision. For a more extensive list of deductible and nondeductible medical expenses, health club dues, and funeral expenses, review IRS Publication 502: Medical and Dental Expenses.

Example: Medical expense deduction

Maria, who files as single, has an AGI of $60,000 and paid $8,000 in deductible medical expenses during the year. Her deduction floor is 7.5% of AGI: $60,000 × 0.075 = $4,500. She can deduct only the amount above that floor: $8,000 − $4,500 = $3,500.

Answer: $3,500 deductible medical expense

State and local taxes

State and local taxes (commonly known as SALT) include state income tax withheld from wages (box 17 of Form W-2), any state balance due paid when filing a return, and state estimated tax payments. Federal income tax is never deductible, whether it was withheld, paid as estimated tax, or paid as a balance due with the return. A taxpayer elects to deduct either state and local income taxes or state and local general sales taxes - not both. The sales tax deduction can be based on the IRS’s optional sales tax tables or on actual receipts, which is worth doing if you made a large purchase that carried a high sales tax (see line 5a, Schedule A, Form 1040). Real estate taxes and ad valorem taxes on personal property (such as a vehicle) are also included, as are state unemployment and disability taxes withheld from wages. Social security, Medicare, and railroad retirement taxes withheld from wages are federal taxes, so they aren’t deductible. For 2025, the total SALT deduction is capped at $40,000 per return ($20,000 if married filing separately); the cap is reduced if modified AGI is more than $500,000 ($250,000 if married filing separately), but not below $10,000 ($5,000 if married filing separately). The cap applies only to taxes deducted on Schedule A. Real estate and personal property taxes paid in carrying on a trade or business or a rental activity are deducted on Schedule C, E, or F instead (for example, property tax on a business building, business equipment, or a rental house), and the cap doesn’t apply to them. State and local taxes on net income, though, are deducted on Schedule A and count toward the cap even when the income comes from a business.

Definitions

SALT (State and local tax) deduction

A federal itemized deduction allowing taxpayers to deduct certain state and local taxes paid during the year, including income taxes (or sales taxes) and real estate and personal property taxes. For 2025 the deduction is capped at $40,000 per tax return ($20,000 if married filing separately), reduced when modified AGI exceeds $500,000 ($250,000 if married filing separately) but not below $10,000 ($5,000 if married filing separately).

Ad valorem tax

A tax based on the assessed value of property, most commonly applied to real estate and personal property such as vehicles. “Ad valorem” is Latin for “according to value.” These taxes are generally deductible as an itemized deduction on Schedule A.

Example: SALT deduction cap

John and Linda, married filing jointly, paid $18,000 in state income tax, $12,000 in real estate tax, and $15,000 in personal property tax during the year - a total of $45,000 in state and local taxes. Their modified AGI is under $500,000, so the cap isn’t reduced. Because the SALT deduction is capped at $40,000, they can deduct only $40,000 on Schedule A.

Answer: $40,000 SALT deduction

Mortgage interest, points, and investment interest

You may deduct the interest on up to $750,000 ($375,000 if married filing separately) of acquisition debt - debt secured by your main or second home and used to buy, build, or substantially improve that home. A higher $1 million limit ($500,000 if married filing separately) applies to debt incurred before December 16, 2017. A qualified home is a main or second home, and can be a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. See IRS Publication 936: Home Mortgage Interest Deduction for full details.

Points paid to purchase a main home are also deductible in the year paid. Mortgage insurance premiums are no longer allowed as an itemized deduction. See IRS Publication 936 for further details on mortgage interest topics. Personal interest, such as interest on credit cards and other consumer loans, isn’t deductible; the exception for 2025 through 2028 is car loan interest on a new, U.S.-assembled personal vehicle, claimed on Schedule 1-A rather than Schedule A.

Investment interest, the interest on money borrowed to buy taxable investments, is deductible only up to the year’s net investment income, figured on Form 4952; the excess carries forward to later years. Whether interest is deductible, and where, follows how the borrowed money was used (the interest tracing rules), not the property that secures the loan. Mortgage interest on a rental property, for example, is a rental expense deducted on Schedule E, not home mortgage interest on Schedule A.

Definitions

Mortgage points

Prepaid interest paid to a lender at closing to reduce the interest rate on a mortgage loan. One point equals 1% of the loan amount. Points paid to purchase a main home are generally fully deductible in the year paid; points paid to refinance must be deducted over the life of the loan.

Donations to charities

To claim a deduction for charitable donations on your taxes, you must file Schedule A and have donated to a qualified organization, such as a tax-exempt charity under section 501(c)(3) of the Internal Revenue Code or a federal, state or local government (for public purposes) and, if you received something in return for your gift, you can deduct only the amount that exceeds the value of what you received. Examples of qualified institutions include churches, religious organizations, the Red Cross, nonprofit educational agencies, i.e., colleges, public schools, museums, volunteer fire companies, and organizations that maintain public parks.

Under the newly enacted One big beautiful bill act (OBBBA), federal tax rules for charitable giving and homeownership have been substantially updated beginning with tax year 2026. None of the changes below apply to 2025 returns, the year the exam tests; for 2025, charitable gifts are deductible only by itemizers, with no 0.5% floor.

From 2026, taxpayers who do not itemize can deduct up to $1,000 of cash gifts to charity ($2,000 if married filing jointly), and itemizers can deduct only the part of their gifts above 0.5% of AGI. Beginning in 2026, taxpayers in the highest 37% federal income tax bracket will have the value of their itemized deductions, charitable gifts included, capped at a 35% rate.

Volunteers can deduct mileage driven to charitable events and volunteer opportunities, or mileage you used to bring items to a donation site. The IRS allows deductions for both cash and non-cash donations based on annual rules and guidelines. The IRS requires taxpayers to obtain a written letter from the charity for any single donation of cash or property worth $250 or more. Also, the IRS requires further substantiation when the total deduction for noncash donations is more than $500, completed using Form 8283: Noncash Charitable Contributions. A noncash gift of more than $5,000 (one item or a group of similar items) also needs a qualified appraisal and Section B of Form 8283, except that publicly traded securities need no appraisal and are reported in Section A. The limit on most charitable cash contributions is 60% of the taxpayer’s adjusted gross income for the tax year, but you may be limited to 20%, 30%, or 50%, depending on the type of contribution and the organization. Contributions that exceed the limit can be deducted from your tax returns over the next five years. For more details, visit the IRS page on charitable contribution deductions.

Definitions

501(c)(3) organization

A nonprofit organization that has received tax-exempt status from the IRS under Section 501(c)(3) of the Internal Revenue Code. Donations to these organizations are generally tax-deductible. They include charities, religious organizations, educational institutions, and certain other public benefit organizations.

Non-deductible donations include but not limited to:

• Volunteer’s time spent (hourly rate)
• Gifts to family and friends in need.
• Donations to causes that benefit a single person i.e., candidates for public office
• Crowdfunding campaigns are typically nondeductible unless the donee is recognized as a tax-exempt organization as defined above.

Casualty and theft loss deduction

Personal casualty and theft losses are first figured on IRS Form 4684, then transferred to Schedule A, line 15. The loss is the smaller of the property’s adjusted basis or its decrease in fair market value (replacement cost isn’t used), minus any insurance or other reimbursement received or expected. However, for tax years beginning after 2017, taxpayers can no longer claim casualty and theft losses on personal property as itemized deductions, unless the claim is caused by a federally declared disaster. Each such casualty is reduced by $100, and the year’s total is deductible only to the extent it exceeds 10% of AGI; a qualified disaster loss is instead reduced by $500, with no 10% reduction. NOTE: Taxpayers who are not itemizing deductions can increase their standard deduction only by a net qualified disaster loss (Form 4684, line 15). See the Schedule A line 16 instructions for details. A casualty loss must arise from a sudden, unexpected, or unusual event; losses from foreseeable or gradual events, such as ordinary wear and tear or deterioration, do not qualify. An insurance reimbursement isn’t income by itself: it reduces the loss and the property’s basis, and there is a taxable gain only if it is more than the property’s adjusted basis.

Definitions

Federally declared disaster

A natural or man-made catastrophe officially designated by the President of the United States under the Stafford Act. For tax years beginning after 2017, only personal casualty losses from federally declared disasters qualify for the casualty loss deduction (except to the extent of personal casualty gains).

Losses due to the following events that qualify for the casualty and theft deduction:

• Earthquakes
• Hurricanes and tornadoes
• Floods, typhoons, and storm surges
• Wildfires
• Avalanches
• Civil disturbances i.e., lootings and riots

Losses that do not qualify for the casualty and theft loss deduction include:

• Decomposition of wood
• Deterioration of roof shingles or housing foundation
• Termite damage
• Erosion
• Drought

For more detailed casualty and theft information, visit IRS Publication 547: Casualties, Disasters, and Thefts.

Other itemized deductions

Popular miscellaneous itemized deductions include:

• Gambling losses, up to the gambling winnings reported on Schedule 1 (Form 1040); winnings include the fair market value of noncash prizes such as cars and trips. A recreational gambler deducts only wagers lost, supported by records such as casino statements and losing tickets; a professional gambler’s travel and other expenses count as wagering losses under the same limit. From 2026, only 90% of losses are deductible.
• Casualty and theft losses to income-producing property from form 4684
• Federal estate tax on income in respect of a decedent
• Certain unrecovered investment in a pension
• Impairment-related work expenses of a disabled person
• Amortizable bond premium (for example, a bond premium carryforward or a deduction for amortizable bond premium on bonds acquired before October 23, 1986)
• An ordinary loss attributable to a contingent payment debt instrument or an inflation-indexed debt instrument

Unreimbursed employee business expenses aren’t on this list: with the other miscellaneous itemized deductions once subject to the 2%-of-AGI floor, they haven’t been deductible since 2017 (made permanent by P.L. 119-21), except as an adjustment to income for Armed Forces reservists, qualified performing artists, and fee-basis government officials.

Definitions

Income in respect of a decedent (IRD)

Income that a deceased taxpayer was entitled to receive but had not yet been paid at the time of death. It is included in the gross income of whoever receives it - the estate or a beneficiary - and may be eligible for a deduction for the federal estate tax attributable to that income.

View the complete Schedule A (Form 1040) on the IRS website.

The Qualified Business Income (QBI) deduction - which lets owners of qualifying pass-through businesses deduct up to 20% of qualified business income - is covered in Special business deductions, depreciation, and losses. Individual tax credits (such as the child tax credit, education credits, and the earned income credit) are covered later in this course, in the Credits unit.

Itemized deductions on Form 1040-NR

Nonresident aliens can’t claim the standard deduction. The exception is students and business apprentices eligible for benefits under Article 21(2) of the U.S.–India income tax treaty, who may take the standard deduction if they don’t itemize. Other nonresident aliens itemize on Schedule A (Form 1040-NR). Deductions generally must relate to income effectively connected with a U.S. trade or business, but gifts to U.S. charities and casualty and theft losses can be deducted even if they don’t. The schedule allows only:

• State and local income taxes on effectively connected income, subject to the 2025 limit of $40,000 ($20,000 if married filing separately), which is reduced at higher incomes.
• Gifts to U.S. charitable organizations. Gifts made directly to a foreign organization generally aren’t deductible.
• Casualty and theft losses of personal-use property located in the United States, only if attributable to a federally declared disaster.
• Certain other itemized deductions, such as gambling losses effectively connected with a U.S. trade or business (up to gambling winnings), casualty and theft losses of income-producing property, certain unrecovered investment in a pension, and impairment-related work expenses.

Schedule A (Form 1040-NR) has no line for medical expenses.