It can be challenging to understand the suitable tax options for you, especially since certain laws and rules are constantly changing. Homeowners used to pay enough mortgage interest and property taxes to make a tax itemization list worth it. However, since the Tax Cuts and Jobs Act of 2017 (TCJA), you are often better off if you claim a standard deduction over an itemized deduction.
Are you facing up to your taxes this year without much help? If you need to know your best options for itemizing your deductions and whether you should or shouldn’t, you have come to the right place.
What are tax deductions?
Everybody likes to pay less money on taxes if they can legally. Understanding tax deductions is one of the best ways for you to lower your tax liability. You do this by lowering your taxable income. Tax deductions do this by factoring in other investments and expenses you had during the tax year and subtracting them from your adjusted gross income (AGI) when it comes time to figure out how much tax you owe.
There are all kinds of things that can count as tax deductions. For example, donating a certain percentage of your earnings to charity becomes deductible. You, as the taxpayer, then have the choice of how to add in these deductions. That is where itemized, and standard deductions come into play.
Itemized Deductions vs. Standard Deduction
Every American that earns over $1,050 in gross income needs to file taxes. So when it comes back around this time of year, you need to be ready with your expenses, payments, and donations for the year.
When filing a tax return, you have the choice to add up all of your available itemized deductions and then claim them on Schedule A, the tax form the IRS uses to claim an itemized deduction. Or, you can take the standard deduction.
To choose between these, you should understand what each of them entails for your total taxable income.
- A standard deduction is an amount that the IRS predetermines based on your filing status.
- An itemized deduction is exactly what it sounds like: an itemized list of the deductions that qualify for tax breaks.
You choose between the two based on whether your standard deduction is higher or lower than your itemized deduction list. If the standard deduction is higher, you will opt for it since it gives you the biggest break. If not, then while figuring out your itemized deductions might take more time, they will save you more money overall.
Almost every year, the standard deduction you can take is based on your ‘Filing Status,’ i.e., whether you are single, married, filing jointly or separately, or if you are the head of a household. Since the TCJA Act was passed in 2017, standard deductions have practically doubled. For example, for married couples filing jointly, it went from $12,700 to $25,100 in 2021. Single taxpayers and those that are married but file separately saw a rise from $6,350 in 2017 to $12,550 in 2021.
However, in the 2022 tax year, there is even more to consider when you factor in the tax changes from the Trump Tax Reform. These changes cut the $4,050 personal deductions that were possible for you and each member of your household to deduct from 2017. This cut made itemized deductions less beneficial for taxpayers across the board.
Here’s an example of how this plays out: If you are a single filer with $10,000 worth of deductions, you could have made an itemized tax deduction and saved almost $4,000 more on a 2017 tax return than taking a standard deduction. However, since the 2020 Tax Reform came into effect, standard deductions are often the more beneficial route to choose.
The Standard Deduction for 2022 and 2023
|Filing Status||2022 Standard Deduction||2023 Standard Deduction|
|Married Filing Separately||$12,950||$13,850|
|Head of Household||$19,400||$20,800|
|Married Filing Jointly||$25,900||$27,700|
Should you itemize your deductions?
The pool of people who should itemize their deductions has grown dramatically smaller with the passing of those bills.
Itemized might still be an option for you if you have paid many medical expenses during the past tax year. In addition, if you live in a state that charges end-of-year taxes instead of taking them in food, fuel, or clothing taxes, you might also consider making an itemized deductions. Other reasons include if you have paid quite a bit of interest on a home mortgage, have given large gifts to charity during the year, or have the unfortunate consideration of causality or theft losses to claim.
Complete list of itemized deductions
Let’s break it down a little more. If you believe you fall into one or more of the below categories, you should dig in to see if you have surpassed the caps on each one of them before committing to an itemized deduction.
In the previous tax year, medical expenses that you have paid become deductible if they are out-of-pocket expense. However, you only get an actual tax benefit for these costs if they have exceeded 7.5% of your adjusted gross income. Don’t know what that number is? Find it on line 8b of your Form 1040.
Medical expenses include any premiums you paid for any medical insurance as well. You can also include the total cost of doctor visitation fees, lab fees, hospital stays, glasses, surgeries, prescription medications, and ambulance services. Cosmetic surgery doesn’t factor in unless it is deemed essential to correct a deformity that resulted from a congenital abnormality, disease, or accident.
State and local taxes
Regarding deductions on state and local taxes, it can get a bit more complicated. If you live in Alaska, Nevada, Florida, South Dakota, Texas, Wyoming, or Washington, you have the option of deducting state and local sales tax since these states don’t have income taxes.
You need to save all of your receipts over the year and deduct any of the actual sales tax you paid. Otherwise, you can use the IRS’s Sales Tax Deduction Calculator to help you approximate your deductions. Add any large purchases you made during the year, like buying a large vehicle or remodeling your home if you use the approximated amount from the calculator.
Property taxes are also available to claim if you own real estate. This counts as your primary home as well as other land or homes you own. You can also add the property tax you pay when you register any of your vehicles.
You have the choice to claim either income or sales tax, but you can’t claim both. The TCJA also deducts local and state taxes by capping the total amount you can claim. State and local tax deductions are capped at a combined total of $10,000.
Home mortgage interest
Another of the most common itemized deductions is the interest you paid on your home mortgage debt. You can deduct this up to $750,000 for both your primary mortgage and any home equity debt you might have. Congress has also specified that you need to prove in some way that you have used your home equity loan to “buy, build, or substantially improve” your home.
One bonus is that if you have paid mortgage insurance premiums, you can also deduct those premiums. Your AGI must be less than $109,000 if you want to deduct your mortgage insurance premiums or $54,500 if you are married and filing separately. Use the Mortgage Insurance Premiums Deduction Worksheet from the IRS Instructions for Schedule A if you want help calculating this total deduction.
Gifts to charity
Your 2021 itemized deductions may still include gifts to charity. You can do this by claiming a deduction for any cash or property you have donated to a qualified tax-exempt organization. Not sure what companies are qualified and which are not? Most charities will inform you if they have a 501(c)(3) tax-exempt status. However, be aware that some organizations, including churches, are not required to apply for this status, and you might need to use the IRS Tax Exempt Organization Search tool to check.
You also need to keep a thorough deduction record to support it. The depth of the documentation depends on whether your donation was in cash or as a property and the total value of the donation. If you donated cash, having a receipt from the charity with their name and address as well as the date and amount of your documentation will be enough. However, the IRS might require an appraisal if you have made a non-cash donation valued above $5,000.
Casualty and theft losses
For those that have suffered property damage during the past year, either by fire, accident, or natural disaster, you could claim a deduction for the loss. However, this deduction can only be taken on a federally declared disaster, and you can’t take a deduction for those losses covered by insurance. You must also reduce your loss by $100 before you can figure out your deduction.
Miscellaneous itemized deductions
There are several other common itemized deductions that you might think are missing from this list. The TCJA cut out some of the miscellaneous itemized deductions. The miscellaneous itemized deductions available include gambling losses, impairment-related work expenses of a disabled person, and amortizable bond premiums. Find out more about any other applicable itemized deductions in the Instructions section for Schedule A.
Don’t rely solely on deductions
You don’t have to focus entirely on the deduction to make your taxes more affordable. You should also consider tax credits, such as the education tax credit. Dig a bit into the tax credits you qualify for, and you might be surprised at how many tax credits it is easy to overlook otherwise.
Enjoying getting your personal finances squared up at the end of each year? Then, check out Ramit’s resources on personal finances so that you can continue taking steps to make more out of your money.
FAQs About Itemized Deductions
Who should use itemized deductions?
If the value of your deductible expenses exceeds the standard deduction (as noted above, for the tax year 2022 these are: $12,950 for single taxpayers and married couples filing separately; $25,900 for married couples filing jointly; and $19,400 for heads of households), then you should consider itemizing your deductions.
Why might a person choose to itemize deduction?
Taxpayers may itemize deductions when the amount they can deduct is higher than the standard deduction, which will result in less tax owed. In some cases, they are not allowed to use the standard deduction.
Is it better to itemize or take the standard deduction?
To determine whether it makes sense to itemize deductions, add up your itemized deductions and compare the total to the standard deduction available for your filing status. If your itemized deductions are greater than the standard deduction, then itemizing makes sense for you; if not, then claiming the standard deduction makes more sense.
Who cannot use the standard deduction?
Generally, the standard deduction is available to anyone who doesn’t itemize, although there are a few exceptions. You cannot claim the standard deduction if:
- You are married and file separately from a spouse who itemizes deductions
- You were a nonresident alien or dual-status alien during the tax year
- You file a return for less than 12 months due to a change in your accounting period
- You file as an estate or trust, common trust fund, or partnership