- Choosing between the standard deduction and itemizing deductions can help reduce your taxable income and minimize your tax bill
- Itemizing deductions involves listing and totaling eligible expenses such as mortgage interest, medical expenses, and charitable contributions
- Itemizing deductions can be advantageous if your total eligible expenses exceed the standard deduction amount
- It’s important to keep track of supporting documentation for your itemized deductions, such as receipts, tax forms (e.g., Form 1098 for mortgage interest), and statements from charitable organizations.
- Reporting itemized deductions requires using Schedule A, which is an attachment to Form 1040.
- Donations to qualified charitable organizations can also be tax-deductible, but donations made through crowdfunding platforms like GoFundMe are not eligible for deductions
- Each taxpayer’s situation is unique, so it’s advisable to review IRS guidelines or consult with a tax professional to determine the best approach for you each year
Itemized deduction definition
Itemizing deductions involves listing and totaling eligible expenses, such as mortgage interest, medical expenses, and charitable contributions.
The IRS allows you to choose between the standard deduction or itemized deductions, whichever results in a the higher deduction. Being able to optimize your deductions by choosing between the standard deduction and itemizing ultimately helps reduce your taxable income.
Itemized deductions vs. standard deduction
The standard deduction is a fixed amount based on your filing status and is available to all taxpayers. While the standard deduction provides a simple and straightforward approach, itemizing deductions can be advantageous if your total eligible expenses exceed the standard deduction amount.
Itemized deductions FAQs
Is it worth it to itemize deductions?
If your total eligible expenses exceed the standard deduction amount, itemizing deductions can help reduce your taxable income and potentially lower your tax bill. However, if your expenses are relatively low or do not exceed the standard deduction, taking the standard deduction may be more beneficial
What is the downside of itemizing deductions?
The downside of itemizing deductions is that it requires more time and effort to gather and document all eligible expenses, but if it generates a higher tax deduction, the effort could pay off
Do I have to itemize every year if I did it once?
No, you are not required to itemize deductions every year. You have the choice between taking the standard deduction or itemized deductions each year, depending on which option is more beneficial for your tax situation
Are my donations to GoFundMe or other crowdsourcing platforms a charitable donation?
Donations made to individuals or causes through crowdsourcing platforms like GoFundMe are generally not considered qualified charitable donations. To be eligible for a charitable donation deduction, the donation must be made to a qualified charitable organization recognized by the IRS.
Do the eligible expenses for itemizing change every year?
The tax law is constantly changing, however the types of expenses you can deduct if you itemize generally don’t change year over year. The IRS can impose varying limitations on certain expenses, however
What’s the easiest way to tell if I should itemize?
If you own your home or make large donations to charity, it may be worth tracking your expenses to determine if itemizing makes sense.
Since medical and dental expenses have difficult limits to reach (you can only deduct expenses over 7.5% of your AGI) and state and local taxes are capped at $10,000, mortgage interest and charitable donations are the only other options to increase your qualified expenses.
Who isn’t allowed to itemize?
There are no restrictions on who is allowed to itemize deductions as long as they meet the eligibility criteria for specific deductions. However, some individuals may find that their total eligible expenses are lower than the standard deduction amount, making it more beneficial for them to take the standard deduction instead of itemizing.
If you are married but file separately from your partner, you both have to claim either the standard deduction or itemize. For example, if your spouse files a separate return and chooses to itemize, you are also required to itemize, even if it results in a lower deduction.
How do itemized deductions work?
We’ll set the stage for a case study below with Tom and Jerry, who are married filing jointly to demonstrate how itemized deductions work. Tom and Jerry are deciding if they should claim itemized deductions or the standard deduction.
Medical and dental expenses
If you’re itemizing your deductions, you may be eligible to include certain medical expenses such as doctor visits, prescription medications, surgeries, dental treatments, and even certain transportation costs related to medical care on your tax return. However, it’s important to note that only a portion of these expenses become deductible.
The IRS imposes limitations on certain expenses, tax credits and deductions — and for medical and dental expenses, you can only deduct these costs if they exceed a percentage of your adjusted gross income (AGI).
Here’s an example: Tom and Jerry have an adjusted gross income (AGI) of $120,000 in the tax year. Throughout the year, they incurred various medical and dental expenses totaling $10,000.
To determine if these expenses can be deducted, they must calculate the threshold amount. For the current tax year, the IRS sets the threshold at 7.5% of AGI. In this case, 7.5% of their AGI would be $9,000.
7.5% x $120,000 = $9,000
Since Tom and Jerry’s total medical and dental expenses ($10,000) exceed the threshold ($9,000), they can claim a deduction for the amount exceeding the threshold. In this example, they can deduct $1,000 of their medical and dental expenses if they opt to itemize their deductions.
State and local income taxes
State income taxes, local income taxes, property taxes, personal property taxes (like DMV fees) and sales taxes may become deductible if you choose to itemize your deductions.
Similar to medical and dental expenses, the IRS imposes a limit on the amount of state and local taxes that can be deducted. Under current tax laws, there is a cap of $10,000 for the combined deduction of state and local taxes.
For example, Tom and Jerry live in California and own their home. They paid California income tax of $11,500 and property taxes of $6,500 for a total of $18,000 in state and local taxes. If they decide it’s more favorable to optimize, they would only be able to deduct $10,000 of their total $18,000 taxes paid.
If you own your home, you may have a greater opportunity to itemize deductions on your tax return each year. Here’s how:
As a homeowner, you have an obligation to pay property taxes. Property taxes, also known as real estate taxes, are assessed each year by your county and can be paid in installments or can be included in your total mortgage payment.
Regardless of how you pay, a portion of the property tax bill may become a deduction. Property taxes are included in the state and local income tax limitation of $10,000.
Mortgage interest deduction
Unless you paid cash for your home (props to you if you did!), you’re likely paying interest on your home loan. While the actual loan payment isn’t deductible, the interest you pay can become a tax deduction.
Each year, your mortgage lender will issue you a tax form (Form 1098) showing the amount of interest you paid during the year. Hang onto this form to make it easy when tax time rolls around. Contrary to medical expenses and property taxes, the IRS does not impose any limits on mortgage interest paid.
Tom and Jerry own their home and receive a mortgage interest statement from their lender every year. In the current year, Form 1098 reported mortgage interest of $8,200. Tom and Jerry will use this tax form to support the itemized deductions they will claim on their tax return.
Bonus tip: if you refinanced during the year, you should expect an additional tax form for each new lender. You’ll hopefully lock in a lower interest rate when you refinance, which means less interest paid each year. Though this does equate to a huge savings during the life of your loan, it also reduces your itemized deductions.
Donating to qualified charities can help you save on your tax bill. If you opt to itemize your deductions, both cash and non-cash donations to qualified organizations can become tax deductible.
A qualified charitable organization is a registered non-profit organization recognized by the IRS for religious, charitable, scientific, educational or other specific purposes that benefit the public. Qualified organizations will typically issue a year-end statement summarizing your total deductions for the year, along with the organizations Tax ID.
Donations to qualified organizations are deductible up to 60% of your AGI. Tom and Jerry enjoy supporting their community and donated $12,500 to various organizations during the tax year. With an AGI of $120,000, they are eligible to deduct up to $72,000.
60% x $120,000 = $72,000
Because their annual contributions are less than 60% of their AGI, they can deduct their donations in entirety.
How to report itemized deductions
The main part of your tax return is reported on Form 1040, but to report your itemized deductions, you will use Schedule A, which is an attachment to Form 1040.
You’ll need to start with gathering the necessary forms and supporting documentation for your deductible expenses. Here’s a short list of forms and receipts to keep:
- Mortgage Interest Form 1098
- Property Taxes
- Property Tax Bill – property taxes are typically due in two installments each year. You will receive copies of these statements in the mail from your county assessor
- If your real estate taxes are included in your mortgage payment, this amount may be included on Mortgage Interest Form 1098
- Charitable Donations
- Qualified organizations will usually send a year-end statement
- Non-cash donations to places like Salvation Army or Goodwill will usually give you a fillable form to keep for your records
- Medical bills and statements
Pro tip: If you can’t track down your property tax bills, you can get a copy of your payment history online! Do a quick Google search to find your county’s property tax lookup database and search by your address.
Advantages of itemized deductions
Tom and Jerry believe they have enough itemized deductions to lower their tax bill. The standard deduction for a married couple filing jointly is $27,700 in 2023.
Here’s a summary of their total itemized deductions:
Tom and Jerry’s deductions exceed the standard deduction by $4,000. It will be advantageous for them to include Schedule A on their joint tax return and itemize their deductions.
Maintaining good records and investing their resources into their home and charitable organizations helped Tom and Jerry reduce their taxable income by an additional $4,000 through claiming itemized tax deductions.
Marissa Achanzar is part of the sales team at Collective and doubles as a content writer based in Roseville, California. After a successful seven-year-stint in public accounting, Marissa decided to pivot and put her tax compliance and client engagement experience to use by creating practical, people-first educational content.
Marissa is also the founder of Something Good Co., a non-profit that supports foster and at-risk youth in the Sacramento region. In her spare time, she enjoys exercise, trying out new recipes, dabbling on piano or guitar and won’t say no to a good TV/movie marathon. You can find her on LinkedIn or contact her at [email protected]