When you file your taxes each year, you have the choice of taking the standard deduction or itemizing your deductions. The standard deduction is a preset amount that you are allowed to deduct from your taxable income each year. This amount will vary according to your tax filing status and is indexed annually to keep up with inflation.
Alternatively, taxpayers can elect to report itemized deductions. Itemized deductions are specific types of expenses the taxpayer incurred that may reduce taxable income. Types of itemized deductions include mortgage interest, state or local income taxes, property taxes, medical or dental expenses in excess of AGI limits, or charitable donations.
- Itemized deductions help some taxpayers lower their annual income tax bill more than the standard deduction would provide.
- The surviving itemized deductions include several categories like medical expenses, mortgage interest, and charitable donations.
- Itemizing most often makes sense for higher-income earners who also have a number of large expenses to deduct.
Standard vs. Itemized Deductions
Prior to the passage of TCJA, millions of taxpayers were able to claim a larger deduction on their tax returns by itemizing their deductions. Thanks to the higher standard deductions, this may no longer be necessary.
To make the most out of your tax return, read on to learn when to itemize your deductions and when to stick with the standard deduction.
Between the 2018 and 2025 tax years, when the TCJA will be in effect, the number of taxpayers for whom itemizing will pay off is likely to drop significantly due to the much bigger standard deduction.
(Two caveats: The personal exemption disappeared with the TCJA, which may offset this effect for some. On the other hand, the childtax credit doubled and applies to more families, which will push some returns in the other direction.)
The new law also eliminated a number of deductions taxpayers could take previously and changed some others.
Between the 2018 and 2025 tax years, a change in the tax law nearly doubling the standard deduction has made itemizing tax deductions less advantageous for many taxpayers.
The Purpose and Nature of Itemized Deductions
Itemized deductions fall into a different category than above-the-line deductions, such as self-employment expenses and student loan interest. They are below-the-line deductions, or deductions from adjusted gross income (AGI). They are computed on the Internal Revenue Service’s Schedule A, and then the total is carried over to your 1040 form.
When itemized deductions have been subtracted from your income, the remainder is your actual taxable income. Itemized deductions were created as a social-engineering tool by the government to provide economic incentives for taxpayers to do certain things, such as buy houses and make donations to charities.
Which Deductions Can Be Itemized?
Schedule A is broken down into several different sections that deal with each type of itemized deduction.
The following is a brief overview of the scope and limits of each category of itemized deduction. To help with future planning, we’ve included key changes under the new tax law, which mostly started applying from tax year 2018 on.
Unreimbursed medical and dental expenses
This deduction is perhaps the most difficult—and financially painful for which one can qualify. Taxpayers who incur qualified out-of-pocket medical and/or dental expenses that are not covered by insurance can deduct expenses that exceed 7.5% of their adjusted gross income (AGI). This was originally scheduled to rise to 10% starting with the 2019 tax year (payable in April 2020).
However, the 7.5% threshold will remain in place at least through the 2022 tax year, thanks to an extension signed into law on Dec. 20, 2019.
Long-term care premiums
Long-term care premiums are calculated slightly differently than medical expenses are. Long-term care insurance premiums are tax-deductible to the extent that the premiums exceed 10% of an individual's AGI. There is a deduction limit based on your age, and the insurance must be "qualified."
Home mortgage and home-equity loan (or line of credit) interest
Home mortgage interest is deductible on the first $750,000 in loans.Each year, mortgage lenders mail Form 1098 to borrowers, which details the exact amount of deductible interest and points that they’ve paid over the past year.
Taxpayers who bought or refinanced homes during the year can also deduct the points they’ve paid, within certain guidelines. If the mortgage was originated before Dec. 16, 2017, then a higher limitation of $1 million applies. The higher limit still applies if you refinance that older mortgage, as long as the loan amount stays the same. For tax years after 2025, the $1 million limitation reappears regardless of when the loan was taken out.
Home-equity loan or line of credit interest
Home-equity loan/line of credit interest is deductible provided that the borrowed funds are used to buy, build, or substantially improve the home that secures the loan.
Taxpayers who itemize are able to deduct two types of taxes paid on their Schedule A. Personal property taxes, which include real estate taxes, are deductible along with state and local taxes that were assessed for the previous year.
However, any refundreceived by the taxpayer from the state in the previous year must be counted as income if the taxpayer itemized deductions in the previous year. Starting in 2018 until the end of 2025, taxpayers can deduct only $10,000 of these combined taxes. In addition, foreign real estate taxes (not related to a trade or business) are not tax deductible.
Also, if you prepaid your state or local income tax for next year, that amount is not deductible on your current year’s taxes.
Any donation made to a qualified charity is deductible within certain limitations. For cash contributions between 2018 and 2025, the amount that can be deducted is limited to no more than 60% of the taxpayer’s AGI. Excess amounts must be carried over to the next year. Other contributions can be limited to 50%, 30%, or 20% of your AGI, depending on the type of property and organization receiving your donation.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020, created a new above-the-line deduction of up to $300 for charitable donations and relaxed limits on other charitable deductions to increase charitable giving during the COVID-19 pandemic. These included cash contributions and donations of food, and they applied both to individuals and corporations. Note that the provisions passed in the CARES Act expired as of March 27, 2022.
Casualty and theft losses
Any casualty or theft loss incurred as a result of afederally declared disaster can be reported on Schedule A. Unfortunately, only losses in excess of 10% of the taxpayer’s AGI are deductible after subtracting $100 from the loss amount. If a taxpayer incurs a casualty loss in one year and deducts it on their taxes, any reimbursement that is received in later years must be counted as income. Taxpayers must complete Form 4864 and report the loss on Schedule A.
Unreimbursed job-related expenses and certain miscellaneous deductions
Prior to the passage of the TCJA, workers incurring job-related expenses were able to deduct expenses that exceeded 2% of their AGI. Now, you must fall into one of four categories to be able to claim job-related expenses. You must be either an armed forces reservist, a qualified performing artist, a state or local government official working on a fee basis, or an employee with impairment-related work expenses.
Workers who fall into these categories and claim expenses must complete Form 2106. In addition, eligible educators may deduct up to $250 in unreimbursed expenses and can do so by completing Schedule 1.
Other Miscellaneous Deductions
This final category of itemized deductions includes items such as gambling losses to the extent of gambling winnings, losses from partnerships or subchapter S corporations, estate taxes on income in respect of a decedent (IRD), and certain other expenses. Some of these deductions are eliminated or changed from 2018 to 2025.For additional details, refer to the IRS Publication 5307 Tax Reform Basics for Individuals and Families and check with your tax advisor.
Summary of Tax Law Changes
If you’re filing as asingle taxpayerfor the 2022 tax year—or you’re married and filing separately—you will likely be better off taking the standard deduction of $12,950 if your itemized deductions total less than that amount (rising to $13,850 for the 2023 tax year).
The same applies to amarried couple filing jointlywho have no more than $25,900 for 2022 (and $27,700 in 2023) in itemized deductions and heads of household whose deductions total no more than $19,400 for 2022 ($20,800 in 2023).
These deductions almost doubled starting in 2018 after the passage of theTCJA.
Tax deductions you can itemize
- Mortgage interest of $750,000 or less
- Mortgage interest of $1 million or less if incurred before Dec. 16, 2017
- Charitable contributions
- $250 (for educators buying classroom supplies)
- Medical and dental expenses (over 7.5% of AGI)
- State and local income, sales, and personal property taxes up to $10,000
- Gambling losses
- Investment interest expenses
- $2,500 in student loan interest (these do not need to be placed on Schedule A but can be taken above-the-line and subtracted from your taxable income); income phaseout limits apply
Deductions lost because of TCJA
- Mortgage interest: loan amounts from $750,000+ to $1 million
- State and local income, sales, and personal property taxes beyond $10,000
- Natural disaster losses (unless in an area designated by the president)
- Unreimbursed employee expenses
- Alimony payments for divorce agreements after Dec. 31, 2018
- Moving expenses (except active-duty military)
- Tax-preparation expenses
Income Limitations for Itemized Deductions
Previously, taxpayers with AGIs above certain levels were subject to limits on how much they could claim in itemized deductions. These limits, known as the Pease limitations, are suspended from 2018 to 2025 by the TCJA.
Remember to Aggregate
There are times when the additional deduction realized from excess medical or job-related expenses will allow itemized deductions to exceed the standard deduction.Therefore, you should not simply assume you cannot deduct miscellaneous expenses or that you cannot itemize deductions if your itemizable deductions are insufficient by themselves for you to qualify.
The Bottom Line
Many rules concerning itemized deductionsare beyond the scope of this article. Working with an experienced and competent tax preparer can help to ensure those rules are applied to your tax return. Your tax preparer should also be able to allow you to determine whether you should itemize or take the standard deduction. Be sure to take some time to review what to expect from 2018 through 2025 based on the new tax legislation.
An Overview of Itemized Deductions? ›
You may be able to reduce your tax by itemizing deductions on Schedule A (Form 1040), Itemized Deductions. Itemized deductions include amounts you paid for state and local income or sales taxes, real estate taxes, personal property taxes, mortgage interest, and disaster losses.What is the explanation of itemized deductions? ›
What Is an Itemized Deduction? Itemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest.What is an example of an itemized deduction? ›
Types of itemized deductions
Mortgage interest you pay on up to two homes. Your state and local income or sales taxes. Property taxes. Medical and dental expenses that exceed 7.5% of your adjusted gross income.
The schedule has seven categories of expenses: medical and dental expenses, taxes, interest, gifts to charity, casualty and theft losses, job expenses and certain miscellaneous expenses.What is the 2 rule on itemized deductions? ›
The 2% rule for itemized deductions is a concept that used to apply to certain types of miscellaneous expenses in excess of 2% of your adjusted gross income (AGI). In 2018, this rule changed, but some people still qualify to deduct certain unreimbursed employee business expenses.What is the benefit of itemized deductions? ›
You can claim more expenses.
Mortgage interest, property taxes and medical bills are just a few of the expenses allowed with itemization. While some of these categories have caps or limitations, taxpayers with large mortgages who give generously to charity may find they get a larger deduction by itemizing.
Taking the standard deduction might be easier, but if your total itemized deductions are greater than the standard deduction available for your filing status, saving receipts and tallying those expenses can result in a lower tax bill.What are at least 3 things that could be used for itemized deductions? ›
Itemized deductions include amounts you paid for state and local income or sales taxes, real estate taxes, personal property taxes, mortgage interest, and disaster losses. You may also include gifts to charity and part of the amount you paid for medical and dental expenses.What is the difference between itemizing taxes and standard deductions? ›
The difference between the standard deduction and itemized deduction comes down to simple math. The standard deduction lowers your income by one fixed amount. On the other hand, itemized deductions are made up of a list of eligible expenses. You can claim whichever lowers your tax bill the most.How do you maximize itemized deductions? ›
- Medical and dental expenses.
- Deductible taxes.
- Home mortgage points.
- Interest expenses.
- Charitable contributions.
- Casualty, disaster, and theft losses.
What is one disadvantage of itemizing your deductions? ›
You might lose money on certain deductions.
The standard deductible amount might be lower than the amount you could deduct if you itemized. If you're a homeowner, for example, the standard deduction might be less than the total amount of mortgage interest or real estate taxes you've paid and could deduct.
If you choose the standard deduction, you will not be able to claim itemized deductions. These cover many key areas, such as medical costs, charitable donations, state taxes, and various expenses related to owning a home.What expenses are no longer deductible? ›
Expenses such as union dues, work-related business travel, or professional organization dues are no longer deductible, even if the employee can itemize deductions.What itemized deductions are not subject to the 2 limit? ›
2) Deductions NOT Subject to the Two Percent Limit
Miscellaneous tax deductions that are not subject to the 2% limit include: Amortizable premium on taxable bonds. Casualty and theft losses from income-producing property. Federal estate tax on income in respect of a decedent.
Itemized deductions benefit higher-income households more than lower-income households for two reasons: Higher-income households incur more expenses that can be deducted, which makes them more likely to itemize; and the per-dollar tax benefit of those deductions depends on the taxpayer's marginal tax rate, which rises ...Is there an income limit for itemized deductions? ›
The total amount you are claiming for state and local sales, income, and property taxes cannot exceed $10,000. Keep in mind that state, local, sales, and foreign property taxes deducted on Schedule C, Schedule E or F do not have a limit.Who benefits the most from tax deductions? ›
Lower Income Households Receive More Benefits as a Share of Total Income. Overall, higher-income households enjoy greater benefits, in dollar terms, from the major income and payroll tax expenditures.Do itemized deductions get audited more? ›
The IRS may have more opportunities to dig deeper into your taxes when you itemize on your return. As long as you claim legitimate, reasonable deductions, there's no reason to fear an audit.Can you write off gas on taxes? ›
If you're claiming actual expenses, things like gas, oil, repairs, insurance, registration fees, lease payments, depreciation, bridge and tunnel tolls, and parking can all be deducted."Does itemizing reduce taxable income? ›
An itemized deduction is an expense that can be subtracted from your adjusted gross income (AGI) to reduce your taxable income and lower the amount of taxes you owe.
Is mortgage interest an itemized deduction? ›
Since mortgage interest is an itemized deduction, you'll use Schedule A (Form 1040), which is an itemized tax form, in addition to the standard 1040 form. This form also lists other deductions, including medical and dental expenses, taxes you paid and donations to charity.Which is better itemized deduction or optional standard deduction? ›
The rule to follow: If your Expenses > 40% of your income, Itemized is the more tax efficient choice. If your Expenses <= 40% of your income, OSD is the more tax efficient choice.How can I get a bigger tax refund? ›
- Try itemizing your deductions.
- Double check your filing status.
- Make a retirement contribution.
- Claim tax credits.
- Contribute to your health savings account.
- Work with a tax professional.
- Be 18 or older or have a qualifying child.
- Have earned income of at least $1.00 and not more than $30,000.
- Have a valid Social Security Number or Individual Taxpayer Identification Number (ITIN) for yourself, your spouse, and any qualifying children.
- Living in California for more than half of the tax year.
- Educator Expenses. ...
- Student Loan Interest. ...
- HSA Contributions. ...
- IRA Contributions. ...
- Self-Employed Retirement Contributions. ...
- Early Withdrawal Penalties. ...
- Alimony Payments. ...
- Certain Business Expenses.
When you itemize deductions, you are listing expenses that will later be subtracted from your adjusted gross income to reduce your taxable income. If your expenses throughout the year were more than the value of the standard deduction, itemizing is a useful strategy to maximize your tax benefits.What is never deductible on Schedule A itemized deductions? ›
Note: The following items aren't deductible on Schedule A: Federal income and excise taxes, Social Security or Medicare taxes, federal unemployment (FUTA), railroad retirement taxes (RRTA), customs duties, federal gift taxes, per capita taxes, or foreign real property taxes.What expenses are 100% deductible? ›
- A company-wide holiday party.
- Food and drinks provided free of charge for the public.
- Food included as taxable compensation to employees and included on the W-2.
What Is the Standard Homeowners Insurance Deductible? Typically, homeowners choose a $1,000 deductible (for flat deductibles), with $500 and $2,000 also being common amounts. Though those are the most standard deductible amounts selected, you can opt for even higher deductibles to save more on your premium.Does anyone itemize anymore? ›
your new submission deadline is October 16, 2023. Each year when you fill out your federal income tax return, you can either take the standard deduction or itemize deductions. Few people find it worthwhile to itemize anymore, because standard deduction amounts were bulked up by a major tax overhaul in 2017.
Should I keep grocery receipts for taxes? ›
Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents contain the information you need to record in your books. It is important to keep these documents because they support the entries in your books and on your tax return.Can you use bank statements instead of receipts for taxes? ›
Review bank statements and credit card statements. They are usually a good list of what you paid. They may also be a good substitute if you don't have a receipt.Can I claim medical bills on my taxes? ›
You can only include the medical expenses you paid during the year. You must reduce your total deductible medical expenses for the year by any amount compensated for by insurance or any other reimbursement of deductible medical expenses, and by expenses used when figuring other credits or deductions.What is considered a miscellaneous itemized deduction? ›
Miscellaneous expense examples include clothes, a computer, equipment, a work uniform and work boots, with some exceptions. Miscellaneous expenses are defined by the IRS as any write off that doesn't fit into one of their tax categories. Small business owners can claim these expenses to reduce their taxable income.What itemized deductions can be carried forward? ›
Not all credits and deductions have carryforward provisions. The most common tax perks that enjoy carryovers include the adoption tax credit, the charitable contribution itemized deduction, 529 plan deductions at the state level, and capital losses.Are there any deductions you can take without itemizing? ›
Health Insurance Premiums for the Self-Employed
In addition to half of the self-employment tax, business owners are also allowed to deduct amounts they pay for health insurance, even if they don't itemize their taxes.
In recent years, about 30 percent of taxpayers chose to itemize (figure 1). The most common itemized deductions are those for state and local taxes, mortgage interest, charitable contributions, and medical and dental expenses. The revenue cost of those four deductions was just under $240 billion in 2017 (table 1).At what income is it better to itemize? ›
If the value of expenses that you can deduct is more than the standard deduction (as noted above, for the tax year 2023 these are: $13,850 for single and married filing separately, $27,700 for married filing jointly, and $20,800 for heads of households) then you should consider itemizing.Can you deduct health insurance premiums without itemizing? ›
“Self-employed health insurance premiums are deductible as an 'above the line' deduction on Form 1040, which means you can deduct the premium even if you don't itemize deductions on Schedule A,” says Hunsaker.What is the standard deduction for seniors? ›
The standard deduction for seniors this year is actually the 2022 amount, filed by April 2023. For the 2022 tax year, seniors filing single or married filing separately get a standard deduction of $14,700. For those who are married and filing jointly, the standard deduction for 65 and older is $25,900.
Do itemized deductions lower your tax bracket? ›
Itemized deductions lower your taxable income, which usually means they allow you to pay less taxes.What is the maximum itemized deduction you can take? ›
As an individual, your deduction of state and local income, sales, and property taxes is limited to a combined total deduction of $10,000 ($5,000 if married filing separately). You may be subject to a limit on some of your other itemized deductions also.
Some examples include:
- Canceled checks or bank statements.
- Credit card statements.
- Account statements.
- Purchase and sales invoices.
- Transaction histories.
For 2023, as in 2022, 2021, 2020, 2019 and 2018, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.What happens if you have more deductions than income? ›
If your deductions exceed income earned and you had tax withheld from your paycheck, you might be entitled to a refund. You may also be able to claim a net operating loss (NOLs). A Net Operating Loss is when your deductions for the year are greater than your income in that same year.