Itemized deductions: What they are and how they work
When preparing your taxes, itemizing deductions may be one way to lower your tax liability.
What is an itemized deduction?
An itemized deduction is a qualifying expense you can claim on your tax return to reduce your adjusted gross income. By lowering your adjusted gross income, you could lower how much you pay in taxes.
When you file your federal income tax return, you have your choice of claiming deductions: standard deduction or itemized deduction. In some cases, a standard deduction is the best option if you do not have many qualifying itemized deductions such as state and local taxes, mortgage interest, charitable or health care expenses. As a result of the 2017 Tax Cuts and Jobs Act, most taxpayers now take the standard deduction.
However, some people might not qualify for the standard deduction. For example, if you are legally married but both you and your spouse file as “married filing separately,” and they select itemized deductions, the other partner will not be able to claim a standard deduction.
You also might not be eligible if you file a federal income tax return for less than 12 months or when a trust or estate is part of the tax return.
Meanwhile, in some cases, it is better to use itemized deductions to lower your taxable income. That’s the case if you had large medical expenses, suffered a severe loss of personal property due to a declared natural disaster, made charitable contributions or paid mortgage interest and property taxes.
The standard deduction differs by filing status. Unless you have paid large amounts out of pocket for qualified deductions, your itemized deductions might not reduce your balance as much as the standard deduction will.
| Filing status | Standard deduction for 2021 tax year |
|---|---|
| Single | $12,550 |
| Married filing jointly | $25,100 |
| Married filing separately | $12,550 |
| Head of household | $18,800 |
What qualifies as an itemized deduction?
Here’s a list from the IRS showing which expenses qualify as itemized deductions:
- Medical expenses above 7.5 percent of your AGI
- State and local income, sales and property taxes, limited to a total deduction of $10,000
- Investment interest expense
- Charitable contributions
- Mortgage interest on the first $750,000
- Business use of car and home
- Business travel expenses
- Work-related education expenses
- Casualty, disaster and theft losses
How to claim the itemized deduction
To claim itemized deductions, you want to use Schedule A when filing a 1040 or 1040-R. You can use the instructions for filling out Schedule A as a guide in helping you understand which expenses qualify.
You’ll also want to provide documentation supporting your evidence. For charitable contributions over $250, provide a statement showing your donation(s). Your mortgage lender will supply you with form 1098, provided the mortgage interest paid exceeds $600 for that year. Gather and make copies of all documentation to verify the information provided on Schedule A.
Pros and cons of itemized deductions
One of the benefits of itemized deductions is you can declare more expenses. Therefore, if your itemized deductions exceed the amount of a standard deduction, you could lower your taxable income. In turn, you would have less tax liability.
Conversely, while the standard deduction does not require any additional paperwork, itemized deductions do. You need to provide proof that you made these expenses.
Taking itemized deductions is more difficult as there are some limitations you must consider, especially as it relates to healthcare costs. With this in mind, it can be a much more involved and time-consuming process. If you’ve never filed itemized deductions before, you can enlist the help of a tax specialist or use tax software that will guide you through the process.
