When you file your federal income tax with Form 1040, U.S. Individual Tax Return, you have the option of itemizing deductions or taking the standard deduction—an amount predetermined by the IRS, based on your filing status.
Typically, if your total itemized deductions are greater than the standard deduction available for your filing status, you’ll opt to itemize.
However, it’s important to note that there are a couple of circumstances in which taxpayers don’t have a choice on whether to itemize or claim the standard deduction. Nonresident aliens are required to itemize and married couples who file separately have to choose the same method—one can’t itemize while the other claims the standard deduction.
Some common itemized tax deductions include:
- Medical and dental expenses
- State and local taxes
- Real estate mortgage interest
- Gifts by cash or check
- Casualty and theft losses from a federally declared disaster
Assuming you can itemize, to do so you’ll need to keep track of what you spent during the tax year and keep documentation, such as receipts, bank statements, medical bills, and acknowledgment letters from charities.
You’ll also need to keep the following rules and limitations in mind:
- Medical and dental expenses. You can only deduct out-of-pocket medical expenses that exceed 7.5% of your adjusted gross income in 2022.
- State and local income taxes and property taxes. The TCJA capped the deduction for state and local taxes at $10,000. Under prior rules, the deduction for state and local taxes was unlimited.
- Home mortgage interest. If your home was purchased prior to December 16, 2017, you can deduct interest paid on your home mortgage debt of up to $1,000,000. If purchased after December 16, 2017, you can deduct interest paid on the first $750,000. To qualify, the mortgage must have been used to “buy, build, or substantially improve” your home. In other words, home equity debt that was not used for home renovation and remodeling is not eligible.
- Charitable contributions. You can claim a deduction for cash or property donated to a qualified tax-exempt organization.
- Casualty and theft losses. You can deduct losses from a federally declared disaster.
If you’ve been itemizing for a while, you might notice a few deductions missing from that list. Recent tax reform eliminated some miscellaneous itemized deductions, including investment fees, job expenses, and tax preparation fees. The good news is these expenses are still deductible for businesses. The change only impacted individual returns.
Figuring out your total tax savings
Itemized deductions lower your taxable income, which usually means they allow you to pay less taxes. But that depends on your tax bracket.
Let’s say you’re an individual taxpayer, and you made $100,000 of taxable income last year. That puts you in the 24% tax bracket.
But if you claim $20,000 in itemized deductions, your new taxable income is $80,000 moving you down to the 22% tax bracket.
If you only claimed $10,000 in deductions, you would still pay less taxes, but you’d still pay the 24% tax rate.
How do you itemize deductions?
You itemize deductions on Schedule A of Form 1040, which looks like this:
What is the standard deduction?
The standard deduction is a flat amount that the IRS allows you to deduct—no matter how many deductible expenses you have. The standard deduction available to you depends on your filing status.
For the 2022 and 2023 tax years, the available standard deductions are as follows:
For 2017 tax returns, the standard deduction was just $6,350 for single people and $12,700 for married couples filing joint returns. The new tax law (Tax Cuts and Jobs Act) nearly doubled the standard deductions for all filing statuses, so many more people will see a lower tax bill with the standard deduction than they would get from itemizing.
With the higher standard deductions, taking steps to lower your tax bill might be a little more complicated than it was before. Pre-paying your state and local taxes or making a donation to charity might not be enough to push you over the higher standard deduction hurdle. And if you live in a high-tax state, your combined state income taxes and property taxes may have already reached the $10,000 limit.
Itemized deductions vs. standard deduction
If the standard deduction amount for your filing status is greater than the amount of itemized deductions you’d be able to claim, then you should take the standard deduction. And vice versa.
To decide whether it’s worth it to claim itemized deductions rather than the standard deduction, you’ll need to know your filing status and have a rough estimate of your income and the itemized deductions you want to claim for the year. A good place to start is looking at your prior tax return.
To illustrate, say Mark and Sara are a married couple trying to decide whether they should itemize in 2023. They expect their 2023 income and deductions to be pretty similar to 2022, so they pull out their 2022 Form 1040 and look at Line 7 to see their adjusted gross income for 2022 was $100,000.
Let’s go down that list of itemized deductions to see whether Mark and Sara can benefit from itemizing in 2023.
Medical and dental expenses
As we mentioned previously, to benefit from claiming itemizing medical expenses, your total out-of-pocket medical and dental expenses must exceed 7.5% of your AGI in 2023.
For Mark and Sara, that means they would need more than $7,500 in expenses to benefit from deducting medical expenses. Mark and Sara have health insurance, are generally healthy, and don’t have any major medical or dental procedures scheduled for 2023, so they estimate they won’t have more than $7,500 in medical expenses for 2023.
Itemized medical expenses: $0
State and local taxes
Mark makes quarterly estimated tax payments of $5,000 per year for state income taxes. Sara stays home with their young daughter, so she doesn’t make estimated tax payments or have any state income taxes withheld from a paycheck.
They pay roughly $5,000 per year in property taxes on their home, and $200 in personal property taxes are paid with their vehicle registrations. Of the total $10,200 they pay in state and local taxes, Mark and Sara can claim $10,000. The additional $200 deduction is lost since the deduction for state and local taxes is capped at $10,000.
Itemized taxes: $10,000
Mark and Sara pay roughly $8,000 per year in mortgage interest on their home. Their mortgage balance is well under $750,000, and they used 100% of the proceeds to buy their home, so Mark and Sara don’t have to worry about their mortgage interest deduction being limited.
Itemized mortgage interest: $8,000
Gifts to charity
Mark and Sara donate approximately $600 in cash per year and another $300 worth of used clothing and household items to a charity thrift store.
Itemized charitable donations: $900
Adding up itemized deductions
Mark and Sara’s total estimated itemized deductions for 2023 are $18,900 ($10,000 in taxes, $8,000 in mortgage interest, and $900 in gifts to charity). As a married couple filing a joint return, the standard deduction available to them in 2023 is $25,900, so their itemized deductions are $7,000 less than the standard deduction. Unless Mark and Sara wind up paying bill medical bills in 2023 or want to increase their charitable giving drastically, they’re better off claiming the standard deduction for 2023.
If you run the numbers like Mark and Sara did above and your estimated itemized deductions are close to the available standard deduction for your filing status, you’ll probably want to keep records for any available itemized deductions just in case. At tax time, your tax professional can run the numbers both ways to see which method produces a lower tax bill.