Making Itemized Deductions on 1040 Schedule A
Know when it’s worth it to itemize deductions.
Itemizing your tax deductions involves claiming a whole group of allowable paid expenses on a separate tax form—Schedule A that's submitted with your Form 1040. Needless to say, this adds up to quite a bit of work when you're filing your return, not to mention the time you'll invest all year keeping track of the expenses you paid. Available itemized deductions range from medical expenses to charitable gifts to mortgage interest and even state and local taxes.
What Does Itemizing Mean?
Itemizing is just what it sounds like—reporting your actual expenses for various types of allowable deductions, then adding them all together and entering that total on your tax return. You must keep accurate track of what you spend during the year, and you should keep supporting receipts and documentation to show that these expenses are legitimate in case the IRS ever asks for proof.
Documentation can include bank statements, check stubs, property tax statements, insurance bills, medical bills, and acknowledgment letters for charities to which you might have donated.
Itemized Deductions vs. the Standard Deduction
Both the standard deduction and the total of your itemized deductions reduce the amount of income on which you must pay federal income tax. You can claim either the standard deduction or you can itemize individual deductions you qualify to claim—line by line by line—but you can't do both. It only makes sense to choose the one that reduces your taxable income the most.
The standard deduction is the simpler solution: a set amount based on your filing status, (single, married, etc.). The Tax Cuts and Jobs Act (TCJA) more or less doubled standard deductions when it went into effect in January 2018.
As of the 2020 tax year—the return you'll file in 2021—the standard deduction is $12,400 for single taxpayers and for those who are married but filing separate returns. This goes up to $24,800 if you're married and filing jointly with your spouse, or if you're a qualifying widow or widower with a dependent child. It's $18,650 if you qualify for the head of household filing status. It can take a lot of itemized deductions to exceed these generous amounts.
Although you can't claim both the standard deduction and itemize other deductions in the same tax year, you can change your decision from year to year, itemizing on one annual return then claiming the standard deduction on the next.
Most Taxpayers Go With the Standard Deduction
Most taxpayers claimed the standard deduction even before the TCJA, and the TCJA also made tweaks to some itemized deductions, capping them at certain amounts where they were unlimited before. Other itemized deductions were eliminated entirely. As a result, the number of taxpayers who itemized dropped from 31.1% to 13.7% after the law passed.
When Should You Itemize Deductions?
It's to your advantage to itemize when the total of all your individual deductions exceeds the standard deduction for their filing status. Otherwise, it would make no sense—you'd be paying taxes on more income than you'd have to.
For example, a single filer would be better off itemizing if they had total itemized deductions of $13,000 in 2020. This would take an additional $600 off their taxable income because the standard deduction is $12,400.
But if that same filer qualified for a head-of-household deduction and chose to itemize instead, they would end up paying taxes on an additional $5,650—the difference between $13,000 in itemized deductions and the $18,650 standard head-of-household deduction.
When You Must Itemize Deductions
Sometimes the decision to itemize or to claim the standard deduction can be taken out of your hands. Married couples who file separate tax returns must each use the same method. They must both take the standard deduction or they must both itemize, so you're stuck with doing so as well if your spouse is determined to itemize.
What Expenses Can Be Itemized on a Schedule A?
Generally, you can claim itemized deductions in the following categories:
- Medical and dental expenses
- State and local income taxes
- Real estate taxes
- Home mortgage interest
- Mortgage insurance premiums
- Gifts to charity
- Casualty or theft losses
Medical Expense Deduction
Medical and dental expenses include the cost of insurance premiums as long as your employer doesn't reimburse you for them, as well as certain qualifying medical and dental care costs. You can deduct the portion that exceeds 7.5% of your adjusted gross income (AGI) in 2020. Your deduction would be limited to $3,375—the amount that exceeds $4,125 or 7.5% of your AGI—if your AGI is $55,000 and you had $7,500 in qualifying medical expenses.
The threshold was supposed to increase to 10% in 2019, but the Tax Extender and Disaster Relief Act of 2019 extended the 7.5% threshold through 2020.
State and Local Tax Deduction
The TCJA restricts the deduction for state, local, and property taxes to $10,000, or $5,000 if you're married and filing a separate return. This is $10,000 collectively, not $10,000 for each type of tax.
Mortgage Interest Deduction
The mortgage interest deduction is capped at debts of $750,000 and $375,000 for taxpayers who are married and file separate returns. The limitations increase to $1 million and $500,000 if you incurred the debt on which you pay interest before Dec. 16, 2017.
Additionally, the TCJA restricts this deduction to acquisition debt only, not equity debt as has historically been the case, unless the funds from the equity loan are used to "buy, build, or substantially improve" a home, according to the IRS.
Gifts to Charities
Most taxpayers can deduct charitable contributions of up to 60% of their AGI, although some types of gifts are still subject to 20%, 30%, and 50% limits.
You can temporarily deduct up to 100% of your AGI beginning in the 2020 tax year. The 60% rule has been waived for the time being in response to the coronavirus pandemic.
Casualty and Theft Losses
The TCJA limits the casualty and theft loss deduction to losses sustained due to events that occurred in locations that have been declared to be disaster areas by the U.S. president.
Overall Limits for Itemized Deductions
On the bright side, itemized deductions were limited through the 2017 tax year when a taxpayer's AGI exceeded certain limits. These thresholds were called Pease limitations after Representative Donald Pease, who authored the legislation that created the limits.
The total amount of the itemized deductions you could claim used to be reduced by 3% of the amount by which your AGI exceeded that year's threshold up to 80% of your total itemized deductions. This is no longer the case. The TCJA has repealed Pease limitations through at least 2025 when the law sunsets or expires unless Congress acts to renew it.
NOTE: Tax laws change periodically and the above information might not reflect the most recent changes. Please consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it's not a substitute for tax advice.