This guide uses Australian spelling, but the US rules are explained as the IRS applies them. The Australian Taxation Office (ATO) works differently: you claim allowable expenses by category, not by electing between a standard deduction and itemising. Below we cover qualifying expenses, who can claim, how to choose, documentation, and cross-border cautions.
Key Takeaways
- Itemising means totalling eligible Schedule A expenses instead of taking the fixed standard deduction.
- Eligibility turns on filing status, expense type, limits and records.
- Compare your allowable total with the standard deduction before choosing.
- Don't carry US itemising rules onto an Australian return without checking ATO guidance.
What Are Itemized Deductions and How Do They Work?
Definition and purpose
Itemised deductions are individually listed, eligible expenses subtracted from income under US federal rules. They're calculated on Schedule A (Form 1040). Use Schedule A when your total exceeds the standard deduction.
Three terms matter:
- Deduction: reduces taxable income.
- Credit: reduces tax owed directly.
- Adjustment to income: subtracted before adjusted gross income (AGI) is calculated, and available whether or not you itemise.
The basic calculation
Follow these steps:
- List eligible expenses
- Apply each category's thresholds or caps
- Add the allowable amounts
- Carry the total to your return
Paying an expense personally doesn't make it deductible. It must meet the rule for its category.
Common categories at a glance
Limits below are from IRS materials for the tax years shown. Always confirm the current year's figures.
| Category | Key rule (US tax year) |
|---|---|
| Medical and dental | Only the amount above 7.5% of AGI (2025) |
| State and local taxes | Cap of US$40,000 (2025); US$40,400 (2026), with phase-downs for high incomes |
| Home mortgage interest | Debt limit of US$750,000 for loans after 15 December 2017 |
| Charitable gifts | Generally up to 60% of AGI (2025); 0.5% of AGI floor from 2026 |
| Casualty and theft | Federally declared disasters, with a US$100 per-loss rule and 10% of AGI test (2025) |
| Investment interest | Limited to net investment income (Form 4952) |
| Gambling losses | Up to winnings (2025); lesser of 90% of losses or winnings from 2026 |
Where the deduction is reported
Schedule A attaches to Form 1040 or 1040-SR. The latest final version covers tax year 2025, while the 2026 form is still a draft.
US federal, state and foreign systems can treat the same expense differently, so a federal deduction doesn't automatically apply elsewhere.
Who Can Claim Itemized Deductions and Which Expenses May Qualify?
Taxpayer and filing-status eligibility
Most people filing a US return can compare Schedule A with the standard deduction. A married person filing separately must itemise if their spouse does.
Residency changes the picture for Australians:
- Resident aliens (via the green-card or substantial presence test) generally claim the same deductions as US citizens.
- Nonresident aliens generally can't use the standard deduction and must itemise, claiming only specified deductions on Form 1040-NR.
- Substantial presence test: at least 31 days in the current year and 183 weighted days across three years.
Treaty provisions, income source and filing status can all change the outcome.
Medical and dental expenses
Only unreimbursed, qualifying costs count, and only the portion above 7.5% of AGI (2025). Check IRS guidance for eligible expenses, insurance reimbursements and dependants' costs.
State and local taxes and home costs
The state and local tax cap rises to US$40,000 for 2025, falling toward US$10,000 as modified AGI passes US$500,000.
Mortgage interest is limited by loan size, and Form 1098 reports interest from US$600. That US$600 figure is a reporting threshold, not a deduction limit.
Charitable contributions
Gifts must go to qualifying organisations. Not every payment to a non-profit is deductible.
- Gifts of US$250 or more need a written acknowledgement.
- Non-cash gifts over US$500 generally need Form 8283.
- Donated goods require valuation and receipts.
Other and less common deductions
Disaster-related casualty losses, investment interest and gambling losses apply in narrow cases. From 2026, certain state-declared disaster losses also qualify. Confirm each is still available for your tax year.
Itemized vs. Standard Deductions: How Should You Decide?
Itemised vs. Standard Deductions: How Should You Decide?
How the standard deduction works
The standard deduction is a fixed amount that varies by filing status and year.
| Filing status | TY2025 | TY2026 |
|---|---|---|
| Single / married filing separately | US$15,750 | US$16,100 |
| Head of household | US$23,625 | US$24,150 |
| Married filing jointly | US$31,500 | US$32,200 |
For 2026, an extra US$1,650 applies for age or blindness (US$2,050 if unmarried). Dependants have a lower basic amount.
The comparison process
- Calculate allowable itemised deductions.
- Identify your standard deduction.
- Compare the two.
- Use the larger.
You generally can't claim both on one federal return.
When itemising may be beneficial
Itemising can tip the balance when you stack larger deductions, such as:
- Large mortgage interest
- High eligible taxes
- Big charitable donations
- Heavy medical costs
- A qualifying casualty loss
One deductible expense alone rarely does it. The total must beat the standard deduction.
Illustrative comparison
Hypothetical figures, for explanation only. A single filer in 2026 has the following:
- Allowable state and local taxes: US$9,000
- Mortgage interest: US$7,500
- Eligible charitable gifts: US$2,000
- Total itemised: US$18,500
The 2026 standard deduction is US$16,100, so itemising reduces taxable income by US$2,400 more. If the total were US$14,000, the standard deduction would win.
Federal, state and international considerations
A state may tie eligibility to your federal choice, so the best federal outcome may not be best for the state return. Australians with US obligations should assess both systems separately, considering residency, treaty provisions, foreign tax credits and reporting.
How to Calculate, Document, and Claim Itemized Deductions
Gather supporting records
Collect:
- Receipts and donation acknowledgements
- Mortgage interest statements (Form 1098)
- Property and state tax bills
- Medical records and insurance statements
- Proof of unreimbursed payments
Each record should show date, amount, recipient and the link to the deduction.
Calculate allowable amounts
Separate expenses by category, strip out reimbursements and non-qualifying amounts, apply caps, and keep the supporting calculations behind each figure. Don't include items already deducted elsewhere on the return.
Complete the return and retain evidence
Transfer totals to Schedule A, then to Form 1040. Use the forms for the correct tax year. Keep records for the IRS limitation period in Topic 305: generally 3 years, or 6 years if more than 25% of gross income was omitted.
The ATO, by contrast, generally requires records for 5 years from lodgement.
Australian Context and Common Mistakes
How Australian deductions differ
The ATO groups claims into work-related expenses, gifts to deductible gift recipients, and investment and other expenses. It applies three tests: you spent the money and were not reimbursed, the expense directly relates to earning your income, and you keep a record.
A work-related standard deduction of up to A$1,000 starts in 2026-27, but it's not a US-style election. Specified work deductions reduce it dollar-for-dollar.
Mistakes that can create tax problems
- Claiming personal expenses as work-related
- Overlooking reimbursements that cancel a claim
- Deducting amounts without keeping required records
- Confusing deductions with tax credits
- Using outdated claim limits or thresholds
- Claiming the same expense in both countries without checking the rules
The ATO flagged work-related deductions and omitted income as 2026 risk areas, as noted in its tax-time focus areas. Treatment depends on the taxpayer, expense, income source, jurisdiction and year.
When cross-border support may help
US citizens and resident aliens are taxed on worldwide income, even when living in Australia. A foreign tax credit (Form 1116) may offset double taxation, and Australian residents must declare worldwide income to the ATO, with a possible foreign income tax offset.
Coordinated advice is worthwhile when you face dual residency, foreign income or cross-border business expenses. VJM Global prepares US Form 1040 and 1040-NR returns and supports Australian clients on tax compliance and accounting. Confirm the firm fits your individual or business situation before engaging.
Frequently Asked Questions
What qualifies as itemized deductions?
Eligible US expenses such as medical costs above 7.5% of AGI, state and local taxes, mortgage interest, charitable gifts and certain losses. Check thresholds, caps and records for the relevant year.
What deductions can I claim without itemizing?
Above-the-line adjustments, such as educator expenses, IRA and HSA deductions and student-loan interest, apply either way. The ATO uses different deduction categories that do not follow this US model.
What are the rules for itemized deductions?
You need eligible categories, the right filing status, substantiation and compliance with limits. Use the current year's forms and instructions.
How does the standard deduction work?
It's a fixed US amount based on filing status. You compare it with allowable itemized deductions and take the larger, not both.
What percent of taxpayers itemize?
For tax year 2023, IRS Publication 4801 shows about 15.27 million Schedule A returns out of 160.6 million, roughly 9.5%. This figure covers US returns only.
