How to Itemize Deductions on Your Tax Returns
Itemizing your taxes can seem a little scary at first. This is especially true if you don’t really understand what it means or what you’re doing.
For one line of your tax return, there are two options you can choose from to reduce your taxable income. You can take the standard deduction or itemized deductions to figure out the reduction of your taxable income.
Itemizing could lower your tax burden significantly in certain situations. Start with this beginner's guide to see if it may be worth it to itemize deductions on your tax return.
What Are Itemized Deductions and What Do They Do?
At their simplest, itemized deductions are a list of tax-deductible expenses. These are expenses you incur throughout the year. You may decide to include them on your income tax return to receive a tax deduction.
After making a list of your itemized deductions, you may find that your itemized deductions aren’t greater than the standard deduction. In this case, you may be better off taking the standard deduction on your taxes. Certain situations don’t allow you to take the standard deduction, though.
You are not eligible for the standard deduction if the following pertains to you:
- You changed your annual accounting method and will be filing a tax return for a period of less than twelve months
- You are married but filing taxes as “married filing separately,” and your spouse itemizes deductions
- You’re a dual-status alien or a nonresident alien.
Depending on your unique situation, the standard deduction could actually give you a bigger tax break than an itemized list of deductions. It just depends on what you spent your money on last year.
Expenses That Can Be Itemized
You can find the list of deductions you can itemize on Schedule A. These itemized deductions may change from time to time. What is on the form is based on tax law changes and expiring provisions.
Currently, itemized deductions include the following.
Medical and dental expenses
Qualifying medical and dental expenses can be listed as an itemized deduction. The key is you can only deduct these expenses that exceed 7.5% of your adjusted gross income.
This limit is difficult for many people to hit.
This is especially true when you consider what health insurance pays for. If you have a low adjusted gross income and a high deductible health insurance policy, it is possible for you to take this deduction, though.
Taxes you paid
Itemized deductions allow you to deduct certain state and local taxes you paid during a tax year. For most tax filers filing statuses, the limit to this deduction is $10,000. That said, those filing married filing separately are limited to $5,000 for this deduction.
These taxes can include things such as:
- State and local income taxes or general sales taxes
- State and local real estate taxes
- State and local personal property taxes
- Other specific taxes that qualify
Before the Tax Cuts and Jobs Act of 2017, state and local tax deductions didn’t have a total dollar limit. This is something that could change again in the future.
Interest you paid
Interest paid as part of a qualifying mortgage can be included as an itemized deduction. You usually receive this on Form 1098. You may pay qualifying mortgage interest and not receive one of these forms. You can still claim the interest paid if it meets the rules.
The mortgage interest deduction is limited to the interest on the first $1,000,000 of mortgage debt. This is reduced to $500,000 for married filing separately filers.
You may also deduct points paid for a mortgage and mortgage insurance premiums in this section. Qualifying investment interest is another itemized deduction listed in this section.
Gifts to charity
Under current law, a small amount of cash charitable contributions are allowable without itemizing. However, non-cash donations and larger donations must be itemized. For deductions to count, they must be made to qualifying organizations.
There are specific rules you must adhere to in order to take these itemized deductions. Charitable donations of $250 or more can only be deducted if you have a written acknowledgment of the donation from the charity. It must include the amount of money or what was donated. It must also include whether you got anything in return for the donation.
If your deduction is $500 or more for non-cash contributions, you must fill out Form 8283.
General contributions are limited to 30% of your adjusted gross income. Other rules may exist in certain circumstances.
Casualty and theft losses
If you have a casualty or theft loss from a federally declared disaster, you may be able to claim the loss as an itemized deduction. You’d do so by filing Form 4684.
Other itemized deductions
There is also a list of other itemized deductions that aren’t as commonly taken. These can be completed using line 16. Examples include:
- Gambling losses to the extent of gambling winnings
- Federal estate tax on income in respect of a decedent
- Certain unrecovered investment in a pension
- Impairment-related work expenses of a disabled person
Claiming Your Itemized Deductions
Once you itemize your deductions, you need to know how to claim them.
Assuming that you're using IRS Form 1040, you will need Schedule A to calculate your deductions. You also need to indicate on Form 1040 that you want to take an itemized deduction rather than the standard deduction.
Schedule A gives you step-by-step instructions to make it easier for you to calculate your deductions. It sounds complicated when speaking about it abstractly, but it becomes much easier when you have the forms right in front of you with all of your financial data.
You simply enter the total amount of each type of deduction on the corresponding line.
Some Parts of Itemizing Are Easy
Itemizing and deducting some expenses might sound complex. Not every aspect of itemizing makes you think so hard, though.
Don't let complicated tax instructions deter you. Just follow them step by step and you can itemize your deductions. It may take a couple of hours to get the job done, but could be worth it.
Thankfully, you have many options for figuring out your taxes. These include using the old-fashioned paper forms and written instructions to working with tax software or a tax professional.
Tax software can easily make these calculations for you. The software asks you simple questions to make the determinations. It can speed up the time it takes to figure out whether itemizing makes sense for you, too.
When It Makes Sense to Take Itemized Deductions
You can make things easier for yourself by keeping detailed records of all of your eligible tax deductions throughout the year. That way, when it comes time to file your income taxes, you can easily see whether you have a higher deduction by itemizing your deductions or by taking the standard deduction.
Remember that it only makes sense to take the itemized deductions if they are larger than the standard deduction. If the standard deduction is larger, you don't even have to worry about itemizing since you’ll save more money with the standard deduction.
It’s essential not to get caught up in the hype of getting enough deductions to itemize, too. While itemizing your deductions can help reduce your tax bill further, it could also cost you a significant amount of money.
The only additional benefit you get when you itemize is any amount over the standard deduction.
In 2021, the standard deduction for a single filer was $12,550. If you try to itemize your deductions and end up with $13,000 in qualifying deductions, you get a larger tax benefit by itemizing.
In this case, doing so reduces your taxable income by an additional $450. However, if you contributed $2,000 to a charity you otherwise wouldn’t support to itemize, you won’t come out ahead financially.
At the 22% tax bracket, that $450 extra deduction would save you $99 in taxes and it cost you a $2,000 contribution to get it. That’s a net loss of $1,901. Of course, you’d end up saving $99 if you’d contribute regardless of the tax impact.
Consult a Tax Professional
Taxes can be confusing. It’d be nice if they were simple enough for everyone to understand by simply reading a tax return.
Sadly, that isn’t the case. Instead, the IRS predicts the average person nonbusiness taxpayer needs 9 hours and pays $160 to file their tax return.
If you want help understanding the complex tax code and how to apply it to your situation, paying a tax professional could be worth the money. These tax preparers should know personal federal income tax forms inside out.
For example, Certified Public Accountants must pass an exam and take continuing professional education to keep their license.
These professionals should be able to quickly help you determine whether you should take the standard or itemized deductions. They could also help you find other areas of the tax code that could reduce your tax bill even further.
In the worst case, they could save you some time versus figuring out how to file your taxes on your own.