Should You Claim the Itemized Deduction Instead of Standard Deduction?

This is one of the most common questions that our clients will ask.

You should claim itemized deductions if the sum of the itemized deductions is greater than the standard deduction. We have listed 4 of the most common items our clients in Hong Kong have claimed.

1. Medical and Dental Expenses
2. Property Taxes
3. Home Mortgage Interest Deduction
4. Charitable Contribution

1. What are the major medical and dental expenses deducted on Schedule A?

Below are the most common medical and dental expense deducted on Schedule A.

2. Is foreign property tax deductible on Schedule A?

Real estate taxes paid for US property can be claimed on Schedule A for federal tax purposes.

Some states may allow you to deduct foreign real estate tax as itemized deductions such as New York [1] and California[2].

Under the new regulations, foreign real estate taxes are no longer allowed to be deducted as an itemized deduction on Schedule A for federal tax purposes since 2018.

If the foreign real estate taxes are related to rental properties that are reported on Schedule E, the foreign real estate taxes may be able to be claimed on Schedule E. If you have paid foreign tax based on your foreign rental income, you may be able to claim a foreign tax credit.

3. Are mortgage interest payments eligible to be deducted on Schedule A?

The mortgage interest deduction is eligible for the debts secured by a qualified home which is defined as a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.

Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). The loan may be a mortgage to buy your home, or a second mortgage.

There are deduction limits on the mortgage interest paid and details are shown below.

Deduction limits

* If you purchased the residential property under a binding contract that was in effect on or before December 15, 2017, and the home purchase closed before April 1, 2018, the home acquisition debt is considered as before December 16, 2017

4. What types of charitable contributions are eligible to be deducted?

According to IRC section 501(c)(3), an organization must be organized and operated exclusively for exempt purposes (shown in below table), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities, and it may not participate in any campaign activity for or against political candidates.

Most of the foreign charitable organizations are not considered as a qualified organization for US tax purposes. Charitable contributions made to a qualified organization can be deducted and a searchable database of tax-exempt organization as described in section 501(c)(3) is provided in IRS website via https://apps.irs.gov/app/eos/.

Two Hong Kong organizations eligible for the tax deduction are:

[1] https://www.tax.ny.gov/pit/file/itemized-deductions.htm

[2] https://www.ftb.ca.gov/forms/2021/2021-540-ca-instructions.html