Who Should Itemize?

To understand the itemized deduction, you must first understand what a tax deduction is. You must also understand how the itemized deduction differs from the standard deduction every individual U.S. taxpayer is entitled to claim. Quite simply, a tax deduction lowers the amount of tax you owe by reducing the amount of income subject to tax. The standard deduction is so-called because it is the same for all taxpayers, no matter how much or how little taxable income they have.

However, some taxpayers have large deductible expenses and would see more tax savings by claiming them as itemized deductions. In other words, instead of claiming the lump-sum standard deduction amount, they add up each of their deductions as a separate item. If the total is greater than the standard deduction, they itemize their deduction to receive a larger tax benefit in the form of reduced tax liability. Additionally, non-residents outside the United States who earn U.S. income must itemize because they cannot claim the standard deduction.

Working out the possible tax savings from itemizing your deductions can be complicated. But most popular tax software products, such as TurboTax, can perform the calculations necessary to determine your total itemized deduction. The software will then let you know if you'd benefit from itemizing to reduce your tax liability.

Itemized deductions are reported on Schedule A (Form 1040), Itemized Deductions, and must be included with your federal income tax return. Tax deductions are different from tax credits in that they reduce the amount of income subject to tax. A tax credit lowers the tax you pay on that income.

Reduced Popularity After Tax Law Change

Taxpayers have needed to weigh the benefits of itemizing since adding the standard deduction to the tax code in 1944. That analysis was difficult because the standard deduction was low enough that many taxpayers would receive a larger tax benefit by itemizing. But everything changed with the passage of the 2017 Tax Cuts and Jobs Act (TCJA).

The TCJA nearly doubled the size of the standard deduction, increasing it from $6,500 for individual filers to $12,000 and from $13,000 to $24,000 for married filing jointly (MFJ). Adjusting those amounts for inflation, the standard deduction sits at $13,850 for 2023 and $27,700 for MFJ. For those choosing the head of household filing status, the standard deduction is $19,400 for 2023. The TCJA made other changes that made itemizing less attractive, including capping the amount of state and local taxes (SALT) that could be deducted at $10,000, which is known as the SALT cap.

As a result of the TCJA's changes, itemization became much less popular. Far fewer taxpayers had itemized deductions totaling more than the standard deduction. The 2022 estimate is that 90% of U.S. taxpayers chose to itemize. However, enough taxpayers benefit from claiming the itemized deduction that it may be worth exploring if you have a lot of deductible expenses.

What Are Itemized Deductions?

Itemized deductions generally fall into five categories:

1. Homeowner's expenses
2. State and local taxes
3. Charitable contributions
4. Out-of-pocket medical expenses
5. Miscellaneous

Explanations of each type are in the sections that follow.

Homeowner's Expenses

The U.S. tax code is generous to homeowners and gives them a number of tax benefits not available to those who don't own a home. The most significant of these benefits is the “home mortgage interest deduction." This deduction lets homeowners deduct the mortgage interest they pay over the tax year from their reported income. Thus, the larger your home mortgage payment amount, the greater your tax benefit.

But there are some limits on the deduction that often end up punishing those who own homes in high-priced areas, like New York, San Francisco, and Los Angeles. Until the passage of the TCJA, homeowners could deduct the interest paid on home loans of up to $1 million. But the legislation lowered that amount to $750,000.

The deduction is available for mortgages used to purchase a house, condominium, co-op, mobile home, boat, or similar property, so long as it has sleeping, cleaning, and toilet facilities. To find the amount of mortgage interest you paid for a year, look at Form 1098, Mortgage Interest Statement, which servicers must mail out each January.

State and Local Taxes

While subject to the $10,000 SALT cap, you can deduct amounts you pay for state and local taxes. These include:

• Property taxes. Most local governments — and some states — impose some type of real estate tax.
• State and local income taxes. These amounts are deductible, whether withheld by your employer or paid by you directly as a self-employed individual.
• Sales taxes. Few people track the sales tax they pay. But if your total sales tax payments exceed the state and local income tax you pay, you may deduct the amount you paid in sales taxes. In most cases, sales tax payments are only claimed as itemized deductions when you make a large purchase with sales taxes, such as a pricey boat, motor vehicle, or home renovation.
• Personal property taxes. These are taxes imposed on non-real estate property you may own, where the amount is calculated based on its value. For example, if your state charges you to register your car based on its value, that fee is deductible as a personal property tax payment.

Charitable Donations

Any money or value of the property you donate to a charitable non-profit organization is often deductible. Note that the IRS must have approved the charity to which you donate, or you could lose your deduction if the agency chooses to audit your returns.

If you choose to donate cash or property valued at more than $250, the IRS may require that you prove its value. For donations of $250 or more, the IRS requires a written acknowledgment from the charity, but they will usually accept a canceled check or credit card receipt.

When you donate property valued at more than $5,000 to a charity, you must provide a written appraisal to prove its value.

Out-of-Pocket Medical Expenses

It is usually difficult to deduct your medical expenses and dental expenses unless you have large medical bills. That's because medical expenses are only deductible to the extent they exceed 7.5% of your adjusted gross income (AGI). Remember, that's 7.5% of your out-of-pocket expenses. So, amounts that insurance picks up don't count toward your deductible expenses. However, if you don't have employer-provided health insurance paid with pre-tax income, you can often deduct your premiums for health, dental, and vision insurance.

To show how the medical deduction expense would work on a tax return, let's assume you prepare a Form 1040, U.S. Individual Income Tax Return, that reports an AGI of $75,000 and you have $10,000 in eligible medical bills. You would first calculate 7.5% of your AGI ($75,000 x 0.075), which is $5,625. Since you can only deduct expenses above that amount, you subtract $5,625 from your $10,000 in total medical expenses, which results in a $4,375 deduction.

Miscellaneous Deductions

As the name implies, "miscellaneous deductions" is a catch-all term for deductions that don't fall into one of the above-listed categories, most of which are not commonly claimed. Miscellaneous deductions include:

• Gambling losses up to the amount of your winnings
• Casualty and theft losses from income-producing property
• Some fines and penalties that are not the result of violations of the law
• Ponzi scheme losses

Non-Itemized Deductions

Some deductions are available to taxpayers, regardless of whether they claim the standard deduction or itemize. These include:

• Student loan interest deduction. You can deduct up to $2,500 of the interest you pay on a student loan each year from your tax bill.
• Educator expense deduction. For 2023, teachers and other educators could claim a deduction of up to $300 for unreimbursed, out-of-pocket payments for classroom-related expenses.

Still Have Questions? An Attorney Can Help

If you believe you have deductions that would be worthwhile to itemize but have questions about what qualifies and how to calculate the deductions, a tax attorney can help with your tax preparation. An experienced tax attorney can guide you through the often complex process of properly accounting for your itemized deductions on your tax forms. They can ensure that your deductions are properly documented so that you receive the maximum allowable tax benefit. If the IRS is questioning itemized deductions you have claimed in the past, an attorney can help guide you through the agency's appeals process.