Tax season has arrived, and with it comes the question: to itemize or not to itemize?
Every year, millions of American taxpayers must choose whether to take the standard deduction the Internal Revenue Service (IRS) offers or to claim itemized deductions to maximize tax savings.
Let’s look closer at the factors at play and which taxpayer situations make the extra hassle of itemizing deductions pay off.
Read more: Everything you need to file your taxes on time
What is a standard deduction?
The standard deduction is the deduction most taxpayers claim. It simplifies tax filing, using an amount set by the IRS that is deducted from your taxable income according to your filing status.
The standard deduction reduces your taxable income even if you don’t have any deductible expenses and is adjusted every year to account for inflation. As the IRS website states, you may also be eligible for additional standard deductions if you’re blind, disabled, or over 65.
Although taking the standard deduction is easier because it doesn’t require tracking expenses, your goal is a lower tax bill. So if you have deductible expenses that add up to a bigger break, itemizing is generally the better choice. We’ll explain how to figure that out.
Single taxpayers or head-of-household filers who are 65 and older can take an additional standard deduction of $1,950 on top of the standard amount. Married couples filing jointly who are over 65 are eligible for an additional $1,550 per person or a total $3,100 in deductions. Blind taxpayers can also deduct more money depending on their age and filing status.
Read more: What is taxable income?
What is an itemized deduction?
While few taxpayers choose to do so, the IRS allows you to pick from a menu of individual deductions that can ultimately add up to a lower tax bill than if you took the standard deduction. That’s known as itemizing.
The rub is you can’t take both the standard deduction and itemized deductions — you must pick one approach and stick to it. While itemizing deductions can seem intimidating, most tax software walks taxpayers step-by-step through the process.
Above-the-line deductions vs. below-the-line deductions
Itemized deductions are sometimes referred to as below-the-line deductions. For tax purposes, “the line” is your adjusted gross income. So below-the-line deductions are adjustments you’re allowed to make after calculating your taxable income.
Above-the-line deductions are adjustments you’re allowed to make before you calculate AGI. Bonus: You can take them whether you choose to take the standard deduction or itemized deductions. Common above-the-line deductions include student loan interest, retirement and health savings account contributions, educator expenses, and qualified business income.
Just remember, when you’re talking about itemizing, you’re dealing with below-the-line deductions.
Read more: Tax credit vs. tax deduction: What's the difference and which is better?
5 common itemized deductions
It pays to determine which deductions you’re eligible for. Here are a few common itemized deductions. You should review the rules for each carefully to determine your eligibility or consult a tax pro.
1. Medical expense deduction
If your medical bills total more than 7.5% of your adjusted gross income (AGI), you can deduct medical and dental expenses in excess of that amount. This includes unreimbursed costs for prescription drugs, payments for telehealth or hospital care, dentures, and much more.
Self-employed individuals can also claim a deduction for health insurance premiums.
2. Mortgage interest deduction
If you financed a home or second home, you’re probably eligible for a deduction on the interest you pay on the mortgage. Limitations apply, however: The IRS allows deductions on home mortgage interest up to the first $750,000 of your mortgage debt (or $375,000 for married filing separately).
3. Charitable contribution deduction
Your charitable donations can be tax-deductible but there are some caveats. The charity that benefits from your bounty must be an IRS-recognized organization and you can only deduct a portion of your adjusted gross income (usually about 60%).
Use the IRS Tax Exempt Organization Search here to determine if your charitable donation qualifies.
4. Property tax and local tax deduction
If you live in a state with steep property taxes, there is a silver lining. Using what’s referred to as the SALT deduction, homeowners can write off up to $10,000 in personal property taxes as well as state and local taxes, local sales tax, and in some cases even state income taxes.
However, this piece of tax law is set to expire in 2025, so changes are on the horizon for future tax years.
5. Casualty loss deduction
Keep in mind that the IRS provides an array of other types of less common itemized deductions (yes, you can actually deduct your gambling losses) that may pay off in specific tax situations or during certain tax years.
But itemizing in general has become much less common since the passage of the 2017 Tax Cuts and Jobs Act, which substantially increased the standard deduction and prompted millions of people to dispense with itemizing.
The individual income tax provisions in the law expire in 2025 and are certain to the subject of intense negotiating when Congress considers what provisions to extend.
Pros and cons of the standard deduction
Still not sure when to itemize deductions or if you should even try? Here are the advantages (and a few disadvantages) of taking the simple route in preparing your taxes.
Pros:
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Flat-dollar amount
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Easier, faster process
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No expense tracking or receipts required
Cons:
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Could take less off your taxes than itemizing
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Not available to all taxpayers
Pros and cons of itemized deductions
Think you should take the plunge and itemize your taxes this year? There are a few situations when it makes sense to itemize deductions, especially if you already have to itemize for local taxes. Here are a few other reasons to itemize plus one big reason not to.
Pros:
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Potential to maximize your tax savings
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Learn more about personal finance
Cons:
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Manual, more time-consuming process
There’s no way around it. Itemizing your taxes requires more work, both in keeping records and receipts throughout the year and in preparing your taxes. However, spending that time could pay off — both in a bigger tax refund and empowering you to more closely manage your finances.
Itemize vs. standard deduction: When to itemize deductions
It can be tough to know off the top of your head that your itemized deductions are going to total more than the standard deduction. So before you sit down with your Schedule A (Form 1040) and a calculator, here are a few specific situations where it usually makes sense to itemize your taxes.
1. You're married filing separately and your spouse has itemized deductions.
There’s not much wiggle room on this one. If your spouse files itemized deductions, the IRS says you’ll have to do the same. So gather your bank statements and tax forms and consider a tax professional to help with tax preparation.
2. You own a home.
Many people who financed a home pay enough in mortgage interest alone to equal more than the standard deduction. You’ll need a Form 1098 from your mortgage provider to prove the exact amount of paid interest.
3. You contribute significantly to charity.
Gifts to food banks, clothing drives, nonprofit organizations, and church tithing can add up over the course of the year. Keep in mind that the IRS requires documentation for any donation that totals more than $250.
4. You had a lot of out-of-pocket medical expenses or dental expenses.
If your medical or dental expenses not covered by insurance totaled more than 7.5% of your adjusted gross income, those excess costs will be tax deductible. This applies not just to doctors' fees but also to purchasing glasses, prescriptions, and even long-term care expenses.
5. You suffered property loss as a result of a federally declared disaster.
If you suffered significant property damage as a result of a disaster, you’re probably going to be able to claim a casualty loss deduction. Losses just need to total more than 10% of your adjusted gross income.
6. You paid local income, property, and sales taxes
If you shelled out plenty to your state or city for local income taxes, property tax, or sales tax, that amount may be deductible up to $10,000. If you plan to claim deductions for sales tax, be sure to save your receipts throughout the year.
Frequently asked questions
1. Does adjusted gross income (taxable income) affect whether you should itemize?
As a general rule, you should take the deduction that ensures the biggest refund regardless of your adjusted gross income. However, if your earned income in the last tax year bumped you up a tax bracket, you may want to pay closer attention to itemized deductions that could maximize your tax savings.
2. Do itemized deductions mean a bigger tax refund?
Sometimes, but not always. Itemizing your taxes can result in a bigger refund, but make sure you understand the rules for the allowable deductions and that you have documentation. Otherwise, you’ll risk getting a notice you’re being audited.
3. Do you lose the standard deduction if you itemize deductions on your federal tax return?
Yes. The IRS specifies you can either use the standard deduction amount for your filing status or itemize deductions, but not both. So, if you choose the standard deduction, you lose your opportunity to itemize. Remember that sometimes you may be eligible for a higher standard deduction if you’re blind or over 65 and no one can claim you as a dependent. There are also "above-the-line" deductions available, regardless of whether you itemize.
