Tax season can be overwhelming, especially when you’re trying to figure out whether you should take the standard deduction or itemize your deductions. While the standard deduction offers a flat amount to reduce your taxable income, itemized deductions can provide you with more savings if you have qualifying expenses that exceed the standard deduction. Understanding what itemized deductions are and how they work is crucial to potentially lowering your taxable income and reducing your overall tax bill.
In this article, we will explore everything you need to know about itemized deductions—from what they are, how they affect your adjusted gross income, and the common expenses that qualify, to whether it’s worth it for you to itemize.
What Are Itemized Deductions?
Itemized deductions are specific expenses that you can deduct from your taxable income to reduce the amount of taxes you owe. Instead of accepting the standard deduction, which is a fixed amount based on your filing status, you can “itemize” deductions by listing each eligible expense you incurred during the tax year. These deductible expenses must meet IRS guidelines to be claimed, and they can add up to substantial savings.
When you itemize deductions, you’re essentially subtracting a variety of qualifying costs—like medical bills, mortgage interest, and state and local taxes—from your gross income, lowering your overall taxable income. This in turn reduces the amount of income that is subject to income tax, potentially saving you money.
How Do Itemized Deductions Work?
To claim itemized deductions, you’ll need to file Schedule A (Form 1040) as part of your tax return. This form requires you to list and total various types of deductible expenses, including those related to medical and dental expenses, charitable donations, and mortgage interest.
Once you calculate your total itemized deductions, you will compare the sum to the standard deduction for your filing status. If your itemized deductions exceed the standard deduction, itemizing may be the more advantageous option. For example, in 2024, the standard deduction is $27,700 for married couples filing jointly, while itemized deductions could easily surpass this amount if you have substantial medical expenses, mortgage interest, or state and local taxes.
If your total itemized deductions are less than the standard deduction, it’s better to take the standard deduction, as it would result in a larger tax benefit.
Common Itemized Deductions You Can Claim
Here are some of the most common itemized deductions taxpayers use to reduce their taxable income:
1. Medical and Dental Expenses
You can deduct the portion of your medical expenses that exceed 7.5% of your adjusted gross income (AGI). This includes unreimbursed medical expenses for surgeries, hospital visits, prescription medications, and dental expenses. While this threshold may seem high, those with significant medical expenses may find that it is still worthwhile to itemize deductions.
2. State and Local Taxes (SALT)
The state and local taxes you pay—whether they are income taxes, property taxes, or sales taxes—can be deducted, but the total deduction is capped at $10,000 ($5,000 if married filing separately). This is known as the SALT deduction. Many taxpayers, especially those in high-tax states, find that claiming the SALT deduction can be a significant way to reduce their tax liability.
3. Mortgage Interest
Homeowners can deduct the interest paid on their mortgage for their primary and sometimes secondary residences. This is often one of the largest itemized tax deductions available. In general, you can deduct interest on mortgage debt up to $750,000 for mortgages taken out after December 15, 2017 ($1 million if the mortgage was originated before this date).
4. Charitable Contributions
If you donate to a qualified charitable organization, you can deduct the amount of your donation. This includes cash donations, as well as the fair market value of donated goods like clothing and household items. Keep in mind that you must have proper documentation for your donations, and deductions are generally limited to 60% of your adjusted gross income (AGI).
5. Property Taxes
You can also deduct property taxes on real estate you own, including land, residential property, and commercial property. However, like the SALT deduction, the total amount you can deduct for property taxes combined with other state and local taxes is limited to $10,000 ($5,000 for married filing separately).
6. Job-Related Expenses (for Employees)
While many job-related expenses are no longer deductible for most employees due to the Tax Cuts and Jobs Act (TCJA), certain job-related expenses such as uniforms, professional dues, and supplies may still be deductible for self-employed individuals. Make sure to consult with a tax professional to determine if you qualify for any employment-related deductions.
When Should You Itemize Deductions?
The decision to itemize deductions depends on several factors, and it isn’t always the right choice for everyone. Generally, itemizing is beneficial if your deductible expenses exceed the standard deduction for your filing status. Below are some scenarios where itemizing may make more sense:
1. High Medical Expenses
If you have significant medical or dental expenses that exceed 7.5% of your AGI, you may be able to itemize deductions to reduce your taxable income.
2. High Mortgage Interest or Property Taxes
Homeowners who pay large amounts of mortgage interest or property taxes may benefit from itemizing, especially if their total itemized deductions exceed the standard deduction.
3. Substantial Charitable Donations
If you make large contributions to charitable organizations, itemizing could give you a larger deduction than the standard deduction. This is particularly helpful for those who regularly donate to charity.
4. State and Local Taxes
For those living in high-tax states, the SALT deduction allows you to deduct state and local taxes, which can add up to substantial savings if you itemize.
How Do Itemized Deductions Affect Your Taxable Income?
Itemizing allows you to subtract various eligible expenses from your gross income to calculate your taxable income. Lowering your taxable income means you are taxed on a smaller amount, which can ultimately reduce the amount of income tax you owe.
For example, if you have a total adjusted gross income (AGI) of $100,000 and your itemized deductions amount to $20,000, your taxable income would be reduced to $80,000. If you were instead taking the standard deduction (e.g., $27,700 for married filing jointly), your taxable income would be lower by that amount, resulting in potential tax savings.
How to Decide Whether to Itemize or Take the Standard Deduction
The decision between itemizing deductions and taking the standard deduction largely depends on the total amount of your deductible expenses. If your total itemized deductions are higher than the standard deduction, it’s worth considering itemizing. If not, the standard deduction is the simpler and more beneficial option.
Here’s a quick checklist to help you decide:
- Do you have high medical or dental expenses?
- Are you a homeowner paying substantial mortgage interest and property taxes?
- Do you make large charitable contributions?
- Are your state and local taxes (SALT) significant?
If the answer is yes to any of these questions, you might benefit from itemizing deductions.
Conclusion
Itemized deductions can provide significant savings for taxpayers with high expenses in categories such as medical care, mortgage interest, property taxes, and charitable donations. By understanding what qualifies and how to calculate your itemized deductions, you can reduce your taxable income and lower your tax bill. However, it’s important to evaluate your specific financial situation each year to determine whether itemizing or taking the standard deduction will provide the greatest benefit.
As you prepare your tax return, be sure to keep thorough records of your deductible expenses and consider consulting with a tax professional to ensure you’re maximizing your tax savings. Whether you decide to itemize deductions or take the standard deduction, understanding how these options work will help you make informed decisions and reduce the amount you owe to the Internal Revenue Service (IRS).
If you’re feeling overwhelmed by the complexities of tax preparation or struggling with the tax challenges of your business, consider getting expert help. Tax professionals, like Vyde, specialize in providing tailored solutions to maximize your deductions and ease your financial stress. Reach out to Vyde today and take the first step toward smarter, stress-free tax management!
