What Are Itemized Deductions?

Deductions are expenses that reduce the amount of income that is subject to tax. Federal tax law gives most U.S. taxpayers the opportunity to reduce their tax bills through tax deductions in one of two ways: either by claiming itemized deductions based on their expenses over the tax year or via the standard deduction available to all taxpayers. 

It is important to understand the difference between itemized deductions and the standard deduction because you can only claim one type of deduction for each tax year and it could significantly impact your tax bill.

Most taxpayers claim the standard deduction, but it still benefits many to itemize. The sections that follow will look at how deductions work, the difference between the standard deduction and itemized deductions, and when it benefits you to itemize.

How Tax Deductions Work

While the federal government imposes a tax on your income, it does not tax everything you earn. When you prepare your federal income tax return, you can reduce your tax liability by subtracting certain amounts from your total income each year. These subtractions come in the form of adjustments and deductions.

Adjustments operate in a manner that is similar to deductions, but they are usually taken out of your income before deductions. Most adjustments can be taken regardless of whether a taxpayer itemizes.

Common adjustments include contributions to IRAs and other retirement plans, student loan interest, and self-employed insurance payments. Your adjusted gross income (AGI) is your income after subtracting these adjustments. Deductions are then subtracted from your AGI to determine your taxable income.

Since they are often confused with one another, it is important to note that there is a difference between a tax deduction and a tax credit. A deduction reduces the amount of income subject to tax. A tax credit, on the other hand, offers a dollar-for-dollar reduction in the amount of tax that the taxpayer owes – even after deductions have been factored in.

The Standard Deduction

The standard deduction ensures that every individual taxpayer can keep at least some of their income from being subject to tax. The standard deduction was added to the tax code by the 2017 Tax Cuts and Jobs Act and replaced the personal exemption. If a taxpayer claims the standard deduction, they can't claim any itemized deductions, so taxpayers need to understand that claiming the standard deduction may require them to forgo other deductions.

The Internal Revenue Service (IRS) adjusts the standard deduction amount each year for inflation based on your filing status. For 2023, the IRS set the standard deduction at $13,850 for single filers, $27,700 for married taxpayers filing jointly, and $20,800 for heads of household. For most U.S. taxpayers, these amounts are more than the total of their itemized deductions, which is why an estimated 90% of them claim the standard deduction.

Itemized Deductions

Taxpayers who itemize are entitled to claim a variety of deductions that are not available to those claiming the standard deduction. For individual taxpayers, these are claimed on Schedule A (Form 1040). Commonly claimed deductible expenses include:

• Mortgage interest
• Charitable donations
• Unreimbursed medical expenses and dental expenses that exceed 7.5% of gross income
• Some job-related educational expenses
• Gambling losses, but only up to the amount of your winnings

The home mortgage interest deduction can be claimed on a homeowner's loans taken out on first or second homes, but is only available for the first $750,000 in mortgage debt if you are married filing jointly. That number drops to $375,000 if you are a single taxpayer.

Additionally, many of the taxes you pay to state and local governments are deductible up to $10,000 annually. This limitation on the size of the state and local income tax deduction is important because it can significantly reduce the amounts that can be claimed in high-tax states like New York and California. Taxes that can be deducted include:

• Real estate taxes
• Sales taxes
• Personal property taxes
• State income taxes
• Local income taxes

Should You Itemize?

The choice of whether or not to itemize can be difficult.  Claiming itemized deductions often requires that you calculate the total amount of those deductions to see whether they're more than the standard deduction you are entitled to claim. If you use a tax software program, it can help you make that decision by performing the calculations for you. You can also consult a tax attorney or other tax professional to help calculate your total itemized deduction.

Other factors to consider when deciding whether to itemize are the IRS's record-keeping requirements and the fact it increases the complexity of your tax filings. Sometimes it's easier and cheaper to claim the standard deduction. 

If you are claiming itemized deductions, the IRS requires that you prove you are eligible by providing records, such as canceled checks or credit card receipts to show a charitable contribution to a non-profit organization. Compiling this information and reporting it to the IRS usually requires preparing additional tax forms, which can increase tax preparation costs if you are using a tax professional.

Additional Questions? Talk to a Tax Lawyer

If you have questions about whether you should itemize your deductions or what expenses may be itemized, a local tax attorney can help. A skilled tax lawyer will help you claim your allowable itemized deductions to maximize your tax savings and ensure that you comply with all relevant IRS rules, regulations, and tax rates.