When you file your taxes each year, you have the choice of taking the standard deduction or itemizing your deductions. The standard deduction is a preset amount that you are allowed to deduct from your taxable income each year. This amount will vary according to your tax filing status and is indexed annually to keep up with inflation.
Alternatively, taxpayers can elect to report itemized deductions. Itemized deductions are specific types of expenses the taxpayer incurred that may reduce taxable income. Types of itemized deductions include mortgage interest, state or local income taxes, property taxes, medical or dental expenses in excess of AGI limits, or charitable donations.
Key Takeaways
- Itemized deductions help some taxpayers lower their annual income tax bill more than the standard deduction would provide.
- A taxpayer must choose either the itemized deduction or the standard deduction - they can not elect to take both.
- The surviving itemized deductions include several categories like medical expenses, mortgage interest, and charitable donations.
- Other common itemized deductions include state income taxes, local income taxes, personal property taxes, and disaster losses.
- Itemizing most often makes sense for higher-income earners who also have a number of large expenses to deduct.
Standard vs. Itemized Deductions
Prior to the passage of TCJA, millions of taxpayers were able to claim a larger deduction on their tax returns by itemizing their deductions. Thanks to the higher standard deductions, this may no longer be necessary.
To make the most out of your tax return, read on to learn when to itemize your deductions and when to stick with the standard deduction.
Between the 2018 and 2025 tax years, when the TCJA will be in effect, the number of taxpayers for whom itemizing will pay off is likely to drop significantly due to the much bigger standard deduction.
(Two caveats: The personal exemption disappeared with the TCJA, which may offset this effect for some. On the other hand, the childtax credit doubled and applies to more families, which will push some returns in the other direction.)
The new law also eliminated a number of deductions taxpayers could take previously and changed some others.
Between the 2018 and 2025 tax years, a change in the tax law nearly doubling the standard deduction has made itemizing tax deductions less advantageous for many taxpayers.
The Purpose and Nature of Itemized Deductions
Itemized deductions fall into a different category than above-the-line deductions, such as self-employment expenses and student loan interest. They are below-the-line deductions, or deductions from adjusted gross income (AGI). They are computed on the Internal Revenue Service’s Schedule A, and then the total is carried over to your 1040 form.
When itemized deductions have been subtracted from your income, the remainder is your actual taxable income. Itemized deductions were created as a social-engineering tool by the government to provide economic incentives for taxpayers to do certain things, such as buy houses and make donations to charities.
Which Deductions Can Be Itemized?
Schedule A is broken down into several different sections that deal with each type of itemized deduction.
The following is a brief overview of the scope and limits of each category of itemized deduction. To help with future planning, we’ve included key changes under the new tax law, which mostly started applying from tax year 2018 on.
Unreimbursed Medical and Dental Expenses
This deduction is perhaps the most difficult—and financially painful for which one can qualify. Taxpayers who incur qualified out-of-pocket medical and/or dental expenses that are not covered by insurance can deduct expenses that exceed 7.5% of their adjusted gross income (AGI). This was originally scheduled to rise to 10% starting with the 2019 tax year (payable in April 2020).
However, the 7.5% threshold will remain in place at least through the 2022 tax year, thanks to an extension signed into law on Dec. 20, 2019.
Long-Term Care Premiums
Long-term care premiums are calculated slightly differently than medical expenses are. Long-term care insurance premiums are tax-deductible to the extent that the premiums exceed 10% of an individual's AGI. There is a deduction limit based on your age, and the insurance must be "qualified."
Home Mortgage and Home-Equity Loan (or Line of Credit) Interest
Home mortgage interest is deductible on the first $750,000 in loans.Each year, mortgage lenders mail Form 1098 to borrowers, which details the exact amount of deductible interest and points that they’ve paid over the past year.
Taxpayers who bought or refinanced homes during the year can also deduct the points they’ve paid, within certain guidelines. If the mortgage was originated before Dec. 16, 2017, then a higher limitation of $1 million applies. The higher limit still applies if you refinance that older mortgage, as long as the loan amount stays the same. For tax years after 2025, the $1 million limitation reappears regardless of when the loan was taken out.
Home-Equity Loan or Line of Credit Interest
Home-equity loan/line of credit interest is deductible provided that the borrowed funds are used to buy, build, or substantially improve the home that secures the loan.
Taxes Paid
Taxpayers who itemize are able to deduct two types of taxes paid on their Schedule A. Personal property taxes, which include real estate taxes, are deductible along with state and local taxes that were assessed for the previous year.
However, any refundreceived by the taxpayer from the state in the previous year must be counted as income if the taxpayer itemized deductions in the previous year. Starting in 2018 until the end of 2025, taxpayers can deduct only $10,000 of these combined taxes. In addition, foreign real estate taxes (not related to a trade or business) are not tax deductible.
Also, if you prepaid your state or local income tax for next year, that amount is not deductible on your current year’s taxes.
Charitable Donations
Any donation made to a qualified charity is deductible within certain limitations. For cash contributions between 2018 and 2025, the amount that can be deducted is limited to no more than 60% of the taxpayer’s AGI. Excess amounts must be carried over to the next year. Other contributions can be limited to 50%, 30%, or 20% of your AGI, depending on the type of property and organization receiving your donation.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020, created a new above-the-line deduction of up to $300 for charitable donations and relaxed limits on other charitable deductions to increase charitable giving during the COVID-19 pandemic. These included cash contributions and donations of food, and they applied both to individuals and corporations. Note that the provisions passed in the CARES Act expired as of March 27, 2022.
Casualty and Theft Losses
Any casualty or theft loss incurred as a result of afederally declared disaster can be reported on Schedule A. Unfortunately, only losses in excess of 10% of the taxpayer’s AGI are deductible after subtracting $100 from the loss amount. If a taxpayer incurs a casualty loss in one year and deducts it on their taxes, any reimbursem*nt that is received in later years must be counted as income. Taxpayers must complete Form 4864 and report the loss on Schedule A.
Unreimbursed Job-Related Expenses and Certain Miscellaneous Deductions
Prior to the passage of the TCJA, workers incurring job-related expenses were able to deduct expenses that exceeded 2% of their AGI. Now, you must fall into one of four categories to be able to claim job-related expenses. You must be either an armed forces reservist, a qualified performing artist, a state or local government official working on a fee basis, or an employee with impairment-related work expenses.
Workers who fall into these categories and claim expenses must complete Form 2106. In addition, eligible educators may deduct up to $250 in unreimbursed expenses and can do so by completing Schedule 1.
Other Miscellaneous Deductions
This final category of itemized deductions includes items such as gambling losses to the extent of gambling winnings, losses from partnerships or subchapter S corporations, estate taxes on income in respect of a decedent (IRD), and certain other expenses. Some of these deductions are eliminated or changed from 2018 to 2025.For additional details, refer to the IRS Publication 5307 Tax Reform Basics for Individuals and Families and check with your tax advisor.
Summary of Tax Law Changes
If you’re filing as asingle taxpayerfor the 2022 tax year—or you’re married and filing separately—you will likely be better off taking the standard deduction of $12,950 if your itemized deductions total less than that amount (rising to $13,850 for the 2023 tax year).
The same applies to amarried couple filing jointlywho have no more than $25,900 for 2022 (and $27,700 in 2023) in itemized deductions and heads of household whose deductions total no more than $19,400 for 2022 ($20,800 in 2023).
These deductions almost doubled starting in 2018 after the passage of theTCJA.
Tax Deductions You Can Itemize
- Mortgage interest of $750,000 or less
- Mortgage interest of $1 million or less if incurred before Dec. 16, 2017
- Charitable contributions
- $250 (for educators buying classroom supplies)
- Medical and dental expenses (over 7.5% of AGI)
- State and local income, sales, and personal property taxes up to $10,000
- Gambling losses
- Investment interest expenses
- $2,500 in student loan interest (these do not need to be placed on Schedule A but can be taken above-the-line and subtracted from your taxable income); income phaseout limits apply
Deductions Lost Because of TCJA
- Mortgage interest: loan amounts from $750,000+ to $1 million
- State and local income, sales, and personal property taxes beyond $10,000
- Natural disaster losses (unless in an area designated by the president)
- Unreimbursed employee expenses
- Alimony payments for divorce agreements after Dec. 31, 2018
- Moving expenses (except active-duty military)
- Tax-preparation expenses
Consider preparing a draft copy of Schedule A to see what your potential itemized deductions may be.
How to Claim Itemized Deductions
The first step to claiming itemized deductions is understanding whether this tax election makes sense for you. Gather relevant information on the items mentioned above and compare the amount you may be able to itemized against your potential standard deduction. The standard deduction amounts by filing status for 2022 and 2023 are below.
| 2022 and 2023 Standard Deduction | ||
|---|---|---|
| Filing Status | 2022 Standard Deduction | 2023 Standard Deduction |
| Single | $12,950 | $13,850 |
| Married Filing Joint | $25,900 | $27,700 |
| Married Filing Separate | $12,950 | $13,850 |
| Head of Household | $19,400 | $20,800 |
If the total amount of eligible deductions exceeds the relevant information above, the taxpayer can choose to itemize their deduction by entering the appropriate information on Schedule A of their tax return. The total amount of itemized deductions is then summed on the form, and this total is carried onto the second page of the Form 1040. A taxpayer's itemized deduction is then deducted from a taxpayer's adjusted gross income to arrive at the taxpayer's taxable income.
Special Considerations
Previously, taxpayers with AGIs above certain levels were subject to limits on how much they could claim in itemized deductions. These limits, known as the Pease limitations, are suspended from 2018 to 2025 by the TCJA.
There are times when the additional deduction realized from excess medical or job-related expenses will allow itemized deductions to exceed the standard deduction.Therefore, you should not simply assume you cannot deduct miscellaneous expenses or that you cannot itemize deductions if your itemizable deductions are insufficient by themselves for you to qualify.
Is It Better to Itemize or Take the Standard Deduction?
It depends. For every taxpayer, the answer may be different, as extenuating circ*mstances may result in a higher itemized deduction for some but a higher standard deduction for others. The only way to determine this for yourself is to compare your potential itemized deductions (by completing a draft of Schedule A) by the current standard deduction.
What Are the Biggest Drawbacks of Itemizing?
Itemizing on your tax return may be more administratively burdensome. The IRS may audit your return and ask for receipts or substantiation; therefore, you'll want to make sure your calculations (including limits to what you're subjected to) are correct. In addition, you'll want to maintain records for the entire year to make sure you don't miss any itemization opportunity. Whereas the standard deduction number is given to you by the IRS, your itemized amount has to be calculated.
What Is the 2% Rule for Itemized Deductions?
There is a category referred to as "miscellaneous deductions" which included items such as unreimbursed job expenses or tax preparation expenses. Miscellaneous deductions were subject to itemization as long as they exceeded 2% of your AGI. Miscellaneous deductions have since expired.
The Bottom Line
Many rules concerning itemized deductionsare beyond the scope of this article. Working with an experienced and competent tax preparer can help to ensure those rules are applied to your tax return. Your tax preparer should also be able to allow you to determine whether you should itemize or take the standard deduction. Be sure to take some time to review what to expect from 2018 through 2025 based on the new tax legislation.
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