When Should I Itemize Tax Deductions?

The standard deduction is the simplest way to do your taxes, but sometimes itemizing will save more money. Learn how to start calculating and which route to choose.

Key takeaways:

• Itemizing deductions means you will list all eligible expense deductions on your tax return instead of claiming the standard.
• Most Americans claim the standard deduction since it almost doubled from the Tax Cuts and Jobs Act in 2017.
• If your itemized deductions are more than the standard deduction, consider itemizing.
• Getting help from a tax professional will help you determine the best course of action.

When tax season rolls around each year, it’s easy to put off making your calculations, examining your records, and gathering your income-reporting forms. It can be especially challenging for self-employed individuals or business owners.

A big concern for many taxpayers is whether to itemize deductions on their tax returns versus taking the standard deduction. Of course, you always want to be sure that you minimize your tax burden in any way possible, so it’s no minor consideration. You may decide to itemize if you have a lot of eligible expense deductions, but most Americans claim the standard deduction. This is especially true ever since tax law revisions in 2017 nearly doubled the standard deduction.

Let’s walk through what it means to itemize, how to figure out expenses, and when you should go that route instead of the standard tax break.

What does it mean to itemize deductions?

Itemizing deductions on a tax return means you will list all deductible expenses from the applicable tax year, including charitable donations, out-of-pocket medical expenses, some mortgage expenses, investment interest, tax preparation costs, disaster losses, and others. 

These deductions are subtracted from your adjusted gross income (AGI), potentially lowering your annual tax bill significantly.

Most taxpayers claim the standard deduction—often, it doesn’t make sense to itemize to maximize tax savings. And the standard tax break is a lot easier, given you don’t have to list expenses line-by-line.

How to figure out your deductions

To understand what kind of deductions you’re working with, you’ll need to keep track of your expenses throughout the year. Make sure you have a system in place to maintain accurate, complete records, so you’re not scrambling when it’s tax time.

If you want to calculate your deductions, there are several numbers to keep track of, including:

• Mortgage interest paid: A lender will send you Form 1098, Mortgage Interest Statement, to report what you paid in interest.
• State and local taxes: If you pay state and local income tax, sales tax, personal property tax, or real estate tax, you can add these up to a maximum of $10,000 in deductions.
• Charitable donations: Keep receipts and records of all contributions you made to nonprofits during the year.
• Out-of-pocket medical expenses: You can only deduct out-of-pocket medical expenses that are over 7.5% of your AGI. Eligible expenses include fees for doctor and dentist visits, glasses and contacts, medical supplies, prescriptions, and many others. Just make sure it’s worth tracking all these expenses by first multiplying your AGI by .075 and thinking through whether you are realistically over that amount.
• Costs of property damage: If you reside in an area that is a federally declared disaster area, any damage to your property may qualify for a deduction.
• Miscellaneous deductions: There are a host of other expenses that are possible deductions, including gambling losses, amortizable bond premiums, theft losses from income properties, and penalties paid as restitution or remediation, among others.

If you plan to itemize your deductions next tax season, be sure to keep tabs on all these expenses and others you may be eligible for. Because taxpayers have to list the amounts of each on a tax return, it’s not enough to just have the overall total.

When you should itemize

It makes sense for some taxpayers to itemize, even though most people claim the standard deduction. The standard deductions for the 2020 tax year were as follows:

• Single taxpayers: $12,400
• Married joint filers: $24,800
• Heads of household: $18,650

If you are over age 65 and/or are blind, you can increase the standard deduction, sometimes by more than $5,000. The standard deduction is relatively high now, nearly doubling in 2017 after the Tax Cuts and Jobs Act.

To determine if you should itemize or claim the standard deduction, calculate all the expenses above that you can deduct. At a minimum, ballpark them. If the expense total is greater than the standard deduction for a given taxpayer status, itemizing will get you a bigger deduction and reduce your tax bill even more. If it is less, then the standard deduction is your best bet.

Sometimes, if taxpayers expect to have a similar itemized total to their standard deduction, they’ll go with the standard just to save themselves all the work of keeping receipts and ensuring everything they report is accurate. The IRS may be more likely to audit tax returns with numerous itemized deductions, so it’s crucial to keep excellent records.

Getting help from a tax professional

Tax laws are not the easiest things to understand, and they frequently change as political administrations come and go. When you’re not sure whether you should itemize or take the standard deduction, or you don’t know which of your expenses are deductible, a tax professional can help. 

Talk to the team at Provident CPA and Business Advisors to get all of your tax questions answered. We are experienced in best practices and well-versed in current rules—and will help you pay the least amount of tax legally possible.