An itemized deduction is a tax-deductible expense that you paid in a tax year. Only specific expenses defined by the Internal Revenue Service can be itemized.
Definition and Examples of Itemized Deductions
Itemizing involves reporting your expenses for specific types of allowable deductions, adding them all together, then entering that total on your tax return. The itemized total is subtracted from your taxable income.
If you plan to itemize, you should keep track of your qualified expenses during the year. Keep your receipts and other documents to show that these expenses are legitimate in case the IRS asks for proof.
Documentation can include bank statements, check stubs, property tax statements, insurance bills, medical bills, and acknowledgment letters for charitable donations.
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 and Dental
Medical and dental expenses include the cost of insurance premiums as long as your health plan doesn't reimburse you for them. Other medical and dental care costs can be deducted if they are qualified expenses. You can deduct the portion that exceeds 7.5% of your adjusted gross income (AGI) for 2020 taxes. For instance, if your AGI were $55,000, and you had $7,000 in qualifying medical expenses, your deduction would be limited to $3,375—the amount that exceeds $4,125 (7.5% of your AGI).
State, Local, and Real Estate Taxes
The Tax Cuts and Jobs Act (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. If you're married and file separately, the cap is $375,000. The limitations increase to $1 million and $500,000 if you incurred the debt on which you pay interest before December 16, 2017.
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.
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.
If you itemize, you can temporarily deduct up to 100% of your AGI for charitable contributions throughout 2021.
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 president, unless you file a reimbursement claim and reduce the loss by the amount you were reimbursed.
How Does an Itemized Deduction Work?
When you file your taxes, you have a choice to take a standard deduction or to itemize your expenses for the year. Itemizing allows you to total up your qualified expenses.
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 the standard deduction, or you can itemize individual deductions that 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 more.
The standard deduction is the simpler solution: a set amount based on your filing status, (e.g., single or married). 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 filed 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 election from year to year, itemizing on one annual return and then claiming the standard deduction on the next.
Most taxpayers claimed the standard deduction even before the TCJA, which also made some adjustments to some itemized deductions, capping them at certain amounts where they had been unlimited before. Other itemized deductions were eliminated entirely. As a result, the number of taxpayers who itemized in 2019 dropped from 31.1% to 13.7% after the law passed.
Do I Need to Itemize Deductions?
It's to your advantage to itemize when the total of all your individual deductions exceeds the standard deduction for your filing status. Otherwise, it would make no sense—you'd be paying taxes on more income than you should be.
For example, you would be better off itemizing if you had total itemized deductions of $13,000 in 2020. This would take an additional $600 off your taxable income, because the standard deduction is $12,400.
But if you were to qualify for a head-of-household deduction and choose to itemize instead, you'd 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.
Sometimes the decision to itemize or to claim the standard deduction can be out of your hands. Married couples who file separate tax returns must each use the same method. You must both take the standard deduction, or you must both itemize.
Non-residents must also itemize. They're not eligible to claim the standard deduction.
Itemized deductions used to be limited in the past when a taxpayer's AGI exceeded certain limits. These thresholds were called Pease limitations after Representative Donald Pease, who authored the legislation that established 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 the Pease limitations through 2025 when the law will expire unless Congress acts to renew it.
- Itemized deductions are qualified expenses you can deduct from your taxable income.
- Most people do not benefit from itemizing their expenses because the standard deduction is high enough.
- If your itemized deductions total more than your standard deduction, you should itemize your expenses to save on taxes.
The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.