Itemized deductions: Should you itemize your deductions?

Key Takeaways

• Itemized deductions are a group of expenses that you can subtract from your taxable income instead of the standard deduction, reducing the amount of tax you owe and potentially boosting your refund.
• Adjustments to income or non-itemized deductions, or above-the-line deductions are expenses that you can subtract from your taxable income to arrive at your adjusted gross income (AGI), even if you take the standard deduction.
• You can deduct charitable donations.
• You can deduct medical expenses that exceed 7.5% of your AGI.
• You can deduct the interest paid on your mortgage loan for your primary residence and a second home.
• You can deduct gambling losses.
• Report your itemized deductions on Schedule A on Form 1040.
• Taking itemized deductions may result in a larger deduction than the standard deduction if you have a lot of expenses. However, it requires you to keep track of individual expenses and documentation and to keep them organized.

What are itemized deductions?

Itemized deductions are expenses that you can subtract from your taxable income, reducing the amount of tax you owe. These deductions cover various expenses throughout the year, such as medical expenses, mortgage interest, and charitable contributions.

Unlike the standard deduction, which is a fixed amount that is determined by the IRS and based on your filing status, itemized deductions make it possible to claim specific expenses. By listing these deductions individually on your tax return, you may be able to lower your taxable income, potentially resulting in a lower tax bill or a larger tax refund.

The idea behind itemizing is simple. The more you spend on qualifying expenses, the less of your income the IRS can tax. It’s like giving you a break for being a responsible citizen and spending your money in ways that benefit yourself and your community.

But here's the kicker. You must keep track of all these expenses and provide proof when you file your taxes. This makes itemizing a bit more complicated than simply taking the standard deduction. However, if you have enough expenses, it can be well worth it.

When you file, you'll be able to choose between itemizing your deductions or taking the standard deduction. Work with a Tax Pro to determine which option will be the most beneficial for your unique situation. 

Deductible expenses: Itemized vs non-itemized

When it comes to reducing your taxable income, there are two types of deductible expenses: those you can claim even if you take the standard deduction, and those that require you to itemize. Here's how they differ:

Itemized deductions

Itemized deductions require you to list out specific expenses and subtract them from your taxable income. These deductions are only available if you choose to itemize and typically require more documentation.

Non-itemized deductions or adjustments to income

On the other hand, you can deduct non-itemized expenses directly from your total income without the need to itemize. They're available to all taxpayers, regardless of whether you choose to itemize or take the standard deduction and are used to determine your AGI.

What expenses are itemized, and what expenses are non-itemized?

Now that we have a handle on what itemized and non-itemized deductions are, let's take a closer look at the types of expenses you can deduct. From medical bills to charitable contributions, there's a wide range of costs that can help lower your taxable income. So, grab your receipts and let's explore the world of deductible expenses.

Charitable donation deduction

Wish you could support causes you care about while also saving on taxes? It's possible with the charitable donation deduction.

Here's what you need to know

• When you donate to a qualified charitable organization, you can deduct that amount from your taxable income when you itemize.
• Donations to religious, charitable, educational, scientific, and literary organizations qualify.
• Keep records, like receipts or bank statements, to prove your generosity at tax time.
• The cap for how much you can deduct for charitable donations is 60% of your AGI.

Whether you're giving money, goods, or transporting items and people for a charitable organization, know that your generosity not only makes a difference but also gives you a break on your taxes

Medical expenses deduction

Dealing with medical expenses can be tough, but there's a potential tax break that could provide some relief.

Here's what you need to know

• You can deduct medical expenses that exceed 7.5% of your AGI if you itemize. This means that if your AGI is $50,000, for example, you can deduct medical expenses that exceed $3,750 (7.5% of $50,000).
• Eligible medical expenses include a wide range of healthcare costs, such as doctor's visits, prescriptions, hospital stays, dental and vision care, and more.
• Keep detailed records of your medical expenses, including receipts, invoices, and statements, to support your deduction claim.

By deducting medical expenses over the threshold, you can lower your taxable income and potentially reduce the amount of taxes you owe or increase your refund.

Home mortgage interest 

Owning a home comes with many benefits, and one of them is the potential to deduct the interest you pay on your mortgage from your taxable income.

Here's what you need to know

• You can deduct the interest paid on your mortgage loan for your primary residence and a second home when you itemize.
• There are limits to the amount of mortgage interest you can deduct, depending on when you took out the loan and the amount of the loan. For example, if you’re single, head of household, or married filing separately, you can deduct the interest for home mortgages on the first $325,000 of principal, the first $500,000 if you bought your house prior to December 16, 2017.
• Generally, the loan must be secured by your home and used to buy, build, or improve your primary home to qualify for the deduction.

Whether you're a first-time homeowner or a seasoned property owner, the mortgage interest deduction can help you save money on your taxes while building equity in your home.

Gambling losses

Are you feeling lucky? Even if your bets didn't pay off, there's still a potential tax benefit when it comes to gambling losses.

Here's what you need to know

• To claim gambling losses, you must itemize your deductions instead of taking the standard deduction.
• You can deduct gambling losses up to the amount of your gambling winnings.
• Keep records of your gambling activities, including receipts, tickets, and statements, to support your deduction claim.

It's important to note that gambling losses are considered miscellaneous itemized deductions subject to certain limitations. Therefore, it's advisable to review the IRS guidelines or consult with a Tax Pro to ensure compliance.

Student loan interest

Are you feeling the weight of student loan debt? Well, there's a silver lining. You can potentially lower your taxes by deducting the interest you pay on your student loans.

Here's what you need to know

• You may be able to deduct the lesser of $2,500 or the amount of interest you paid on qualified student loans from your taxable income, even if you take the standard deduction.
• Your modified adjusted gross income (MAGI) is less than the amount specified by the IRS each year.
• To qualify, the loan must have been used to pay for qualified education expenses, and you must be legally obligated to make the payments.

This is an adjustment to income to help reduce your AGI.

Just remember to keep track of your student loan interest payments and any necessary documentation to support your deduction when filing your taxes.

Health savings account contributions deduction

Investing in your health can also pay off financially, especially when it comes to contributing to a Health Savings Account (HSA).

Here's what you need to know

• Contributions you make to your HSA are pretax, which means that they are taken out before taxes and help to lower your taxable income. This is true whether you decide to take the standard deduction or itemize.
• There are annual limits to how much you can contribute to an HSA, depending on whether you have self-only or family coverage. Be sure to stay within these limits to maximize your tax benefits.
• HSA funds can be used to pay for qualified medical expenses, including deductibles, copayments, and certain medical treatments, tax-free.

By contributing to an HSA, you not only invest in your health but also enjoy tax savings that can help you manage healthcare costs more effectively.

Whether you're planning for future medical expenses or looking to save on taxes, contributing to an HSA can be a smart financial move that benefits both your health and your finances.

Claiming itemized deductions on taxes

If you've decided to go the route of itemizing your deductions, you're in for some potentially significant tax savings. But you may be wondering exactly how to go about doing it. 

Your step-by-step guide to claiming itemized deductions

1. Before you start filling out your tax return, gather all necessary documentation to support your itemized deductions. This includes receipts, invoices, statements, and any other records related to your deductible expenses.
2. Next, list out all your deductible expenses in the appropriate categories, which include medical expenses, charitable donations, mortgage interest, state and local taxes, real estate taxes, and miscellaneous deductions.
3. Add up the total amount of deductions in each category to determine your total itemized deductions. Make sure to double-check your math to avoid errors.
4. Compare your total itemized deductions to the standard deduction amount for your filing status. This allows you to choose the option that gives you the greatest tax benefit.
5. When filling out your tax return, use Form 1040, Schedule A to report your itemized deductions. Follow the instructions carefully to ensure accurate reporting.
6. After filing your taxes, keep all documentation related to your itemized deductions for at least three years in case of an IRS audit. This includes receipts, statements, and any other supporting documents.

By following these steps, you can confidently claim itemized deductions on your taxes and potentially reduce your taxable income, saving you money in the long run.

As always, if you're unsure about which deductions you qualify for or how to properly claim them, consider consulting with a Tax Pro. They can provide personalized advice and help maximize your tax savings.

Pros and cons of itemizing deductions

Deciding whether to itemize your deductions or take the standard deduction can have a significant impact on your tax bill. Let's explore the pros and cons of itemizing deductions to help you make an informed decision:

Pros

• Itemizing deductions allows you to deduct specific expenses from your taxable income, potentially resulting in greater tax savings compared to taking the standard deduction.
• Itemizing deductions gives you the flexibility to tailor your deductions to your individual circumstances. You can choose which expenses to include based on what will provide the greatest tax benefit.
• For individuals with significant deductible expenses, itemizing deductions can result in a higher deduction amount compared to the standard deduction, ultimately reducing your taxable income.

Cons

• Itemizing deductions requires meticulous record-keeping and documentation of your expenses. You'll need to keep track of receipts, invoices, and statements to support your deductions, which can be time-consuming and tedious.
• Itemizing deductions can significantly increase the complexity of your tax return, especially if you have multiple deductible expenses to report. You may need to navigate various tax forms and calculations, which can be confusing for some taxpayers.
• Some itemized deductions are subject to thresholds and limits, meaning you can only deduct expenses that exceed a certain percentage of your income or a specified cap. This can reduce the overall tax benefit of itemizing deductions.

Ultimately, the decision to itemize deductions depends on your individual financial situation and the amount of deductible expenses you have. While itemizing deductions can result in greater tax savings for some taxpayers, it requires careful planning, record-keeping, and consideration of the potential drawbacks.

Before deciding whether to itemize deductions or take the standard deduction, it's essential to weigh the pros and cons and consider consulting with a Tax Pro for personalized advice.

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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