What are Itemized Deductions?
Itemized deductions are simply a list of specific expenses the IRS allows you to deduct from your income - under certain circumstances and within certain limits. And since every taxpayer is different, with different amounts and types of income, families, and expenses there’s no one-size-fits-all answer about itemizing or taking the standard deduction.
Many people avoid itemizing because it sounds more complicated than it is. Others avoid it because of an unfounded fear that it will result in an audit. Rest assured, the persistent belief that itemizing deductions raises your risk of being audited is an urban myth, and nothing more.
When Should You Itemize Instead of Claiming the Standard Deduction?
Ultimately, the decision comes down to simple math. If the total amount of your itemized deductions is greater than the standard deduction for your filing status, then you should consider itemizing. For instance, in 2020, the standard deduction is $12,400 for individuals; $18,650 for heads of household; and $24,800 for married couples filing jointly.
Here’s How Itemized Deductions Work
By itemizing your deductions, you first give up the standard deduction. In its place, you list out your expenses in approved categories – interest and medical expenses, for instance – and subtract these expenses from your income. Of course, many itemized deductions are subject to some limits. But if your expenses are large enough, itemizing may be worth it.
What are the Itemized Deductions You Can Claim?
There are several categories of deductions that can be claimed when itemizing. We’ve explained each of these deduction categories below.
1. Deductible Medical Expenses
While medical costs can get pretty expensive, there is good news. You can deduct many of them, including, of course, the health, dental, and vision insurance premiums you pay as well as expenses from surgery to hearing aids, and more. It even includes necessary travel costs like bus fare or parking fees. But there’s a catch. You can only deduct unreimbursed medical care expenses that exceed 7.5% of your adjusted gross income.
For example, Wanda has an AGI of $50,000 and spent $10,000 on medical expenses. The amount of expenses eligible for deduction are $6,250 ($10,000 - ($50,000×.075).
2. Interest Deduction
Own a home? You’re in luck. You can claim the interest on your mortgage. But be careful, the deduction is capped at the interest on the principle of no more than $750,000. But, the cap includes mortgage interest as well as interest on an equity line to improve your home. Other rules may apply.
Aside from mortgage interest, homeownership offers other tax benefits as well. When you take out a mortgage or refinance, you may also be able to deduct any loan origination fees or points you paid.
3. Other Homeowner Deductions:
State and Local Tax (SALT) Deductions
While federal taxes take a big bite, they’re not the only taxes we pay. Fortunately, the IRS allows us to deduct taxes we’ve paid elsewhere, such as property taxes, state and local income or sales taxes, taxes paid to a foreign government, and others. However, the TCJA now limits state and local tax deductions (SALT), including property taxes, to just $10,000.
4. Charitable Deductions
This includes cash or the value of the property you donate to a recognized charity, as well as 14 cents a mile for driving while doing volunteer work.
5. Casualty Loss Deduction
The 2017 TCJA suspended the deduction for all general casualty and theft losses between the 2018 and 2025 tax years. However, you can still claim a casualty loss if it occurred in a federally declared disaster area.
6. Other Itemized Deductions
Currently the entire category of “Miscellaneous Deductions,” has been eliminated. However, we do still have “Other Itemized Deductions.” These deductions include gambling losses up to gambling income, certain unrecovered investments in a pension, impairment-related work expenses (such as a sign-language translator), and casualty and theft losses from certain income-producing properties.
Making the Most of Your Deductions
Now that you’ve seen behind the curtain and know what itemized deductions are and how they work, you can make a more informed decision. And that could help to lower your tax burden and increase your refund this year.