Most of you have seen questions on your tax forms or preparation software that asks whether you want to take the standard deduction or if you want to itemize. From there, you likely asked yourself what standard and itemized deductions are.
We are here to answer that question and help you figure out when to use each deduction. And once you are done reading this guide, you will potentially save more when filing your taxes.
Throughout this guide, you will first learn the differences between an itemized and standard tax deduction. Afterward, we’ll go more in-depth with when to use itemized deductions and what financial situations qualify for this tax reduction.
What Is a Tax Deduction?
Deductions lower your taxable income; therefore, resulting in a lower tax bill. These types of deductions can come in various forms. A few examples include above-the-line, itemized, and standard deductions.
What Are Above-the-Line Deductions?
Before learning about standard and itemized deductions, you will need to understand above-the-line deductions to avoid confusion later on. These deductions are stand-alone adjustments that you can qualify for, whether you choose the standard deduction or to itemize.
If you are using tax software, you will find some of the following deductions when filling out your taxes:
- IRA contributions: you can deduct qualifying IRA contributions
- Health savings account contributions: deduct what you put into your health savings account
- Moving expenses: deduct expenses if you are in the military and moving
- Student loan interest: you can deduct your interest
Itemized Deduction vs. Standard Deduction
Before deciding what type of deduction you will want to use for your taxes, first, you will need to learn the definitions of both. While reading this section, you will learn about the basics of both deductions and when to use them.
What Is a Standard Deduction?
A standard deduction is a fixed amount that you can have deducted from your taxes. These deductibles work best for you if you do not have particular circumstances that you can itemize.
The size of your standard deduction depends on your filing status. For instance, if you are filing as Single, your deduction would be $12,950 (2022). Whereas, if you filed as Head of Household, you benefit from a $19,400 deduction.
What Is an Itemized Deduction?
An itemized deduction is a series of particular expenses you incur throughout the year, which are qualified as deductibles. If you choose to itemize your taxes, you cannot get a standard deduction.
These deductions are in a different category than other deductions like self-employment expenditures. They are below-the-line deductions based on your adjusted gross income (AGI). To calculate your itemized deductions, you will need to use Schedule A. And afterward, you will need to use Form 1040.
Keep in mind that since itemized deductions are below-the-line, you cannot deduct expenses like student loan interest, IRA contributions, and alimony, to name a few.
What Is the Purpose of Itemized Deductions?
The government created itemized deductions to incentivize taxpayers to stimulate the economy with certain activities. A couple of activities, which are types of deductibles, that encourage taxpayers to donate to charitable causes, start a mortgage.
Pros and Cons of Itemizing Deductions
When itemizing your deductions, you have a myriad of advantages that include the various possible deductions, potentially saving more money on your taxes, and being motivated to make additional investments.
However, you will need to spend more time on your tax return by filling out additional forms. Moreover, you must ensure that you organize your records and keep every receipt of items you want to itemize. Furthermore, you will need to research the rules of each category that you want to deduct.
When Should You Itemize Your Deductions or Use Standard Deductions?
We recommend sticking with a standard tax deduction unless the total amount of your expenses surpasses the standard deduction amount. At that point, it will save you more if you use itemized deductions.
However, if you go with an itemized deduction, you will need to fill out more forms. Moreover, you must ensure that you have proof that you can claim these deductions. A couple of examples of proof include receipts or Form 1098 from home mortgages.
If the standard deduction is more than the total of your itemized deductions, you will save a lot more time by taking the standardized deduction. We also recommend keeping up with each year’s standard deductions because they increase over time.
Therefore, if you itemized in the past, it may not be beneficial to itemize now.
Some Taxpayers May Not Be Eligible for the Standard Deduction
If you are eligible to itemize your deductions, you will need to ensure that you do not fall under certain categories, which the IRS will not let take standard deductions. Some of these categories include:
- Nonresident or dual-status alien: unless married to a U.S. citizen, these aliens cannot take the deduction during the year
- Certain marriage circumstances: if someone is married and filing separately from their spouse, who itemizes deductions, they cannot take the standard deduction
- Different filing periods: if someone files for a period of under 12 months because of their accounting situation, they cannot take the standard deductible
Deductions Were Changed Recently: But How?
In 2017, the government enacted the Tax Cuts and Jobs Act (TCJA), which transformed how taxes worked. One way the TCJA changed the standard deduction is by raising it from $6,500 to $12,000 for individual filers.
However, it negatively impacted itemized deductions, which we will cover throughout this guide. A couple of examples of deductions that were lost because of this bill include tax-preparation expenses and alimony payments for divorces after December 31, 2018.
9 Types of Itemized Deductions
As you keep reading, you will learn about the various expenses that you may incur throughout the year that qualify as an itemized deduction. These deductions will range in common categories such as medical expenses to even home mortgage interest.
1. Charitable Contribution
You may claim donations to charitable organizations recognized by the IRS. These programs could include organizations that help the underprivileged, public building maintenance, churches, and other tax-exempt organizations.
However, on top of being limited to who you can donate to, you may only deduct 30% of your AGI for property donations and 50, 60, and 20% for cash donations based on the type of organization that you are donating to.
2. Expenses From Investment Interest
When using brokers or trading platforms, you will likely encounter advisor, transaction, and brokerage fees. You can deduct these fees from what you have made through investments.
However, you cannot claim expenses from investments that were not profitable unless you are eligible for Capital Loss Treatment. This special deduction lets you claim up to $3,000 if you end the year with more capital losses than gains.
3. Other Taxes
If you paid any local or state taxes on your income during the year, you could deduct those. Also, if you own a home, you can deduct any real estate taxes that you paid. However, you can only itemize taxes that are the same year as the taxes that you are filing for.
Therefore, you can’t deduct prepaid taxes.
Keep in mind that until the end of 2025, you can only deduct $10,000 in combined taxes. Moreover, you cannot deduct foreign real estate taxes that are not related to business or trade.
4. Interest From a Home Mortgage
When taking out a mortgage on your home, you will have found yourself paying interest on top of your payments. The interest on your mortgage counts as an itemized deduction. To know how much you paid in deductible interest, mortgage companies will send you Form 1098 each year.
If your mortgage was instituted before December 16, 2017, you could deduct from the first million of your loan. However, if it originated after the date mentioned above, then the limit is $750,000. As long as your loan stays the same, you can use the higher limit if you refinance an older mortgage.
5. Home Equity Loan
The Internal Revenue Service allows you to use this deduction for two residences per taxpayer. If you need an additional way to use your home to save on taxes, you may also deduct the interest that you paid on your home equity loan.
6. Losses From Theft
If you suffered from theft or casualty losses that happened as a result of a federally declared disaster, you could deduct 10% of your AGI. And that percentage is after subtracting $100 from your loss amount.
However, if you were reimbursed for any casualty losses in one year, you must count it as income.
To report your losses, you will want to complete Form 4864 and afterward report your loss on your Schedule A.
7. Unreimbursed Dental and Medical Expenses
You may deduct any medical expenses that exceed 10% of your AGI. However, if you are over 65 years old, it becomes 7.5%. Some expenses that you can claim include:
- Non-cosmetic surgery: necessary procedures
- $0.24 per mile you drive to medical care facilities
- Insurance premiums
- Prescription medication
You can also deduct long-care premiums, but these are not calculated the same way as medical expenses. First off, you must have insurance that is qualified. Afterward, you can deduct long-term care premiums for a certain amount—if they exceed 10% of your AGI.
Another thing to keep in mind is that your deduction limit will vary based on your age. For example, the older you are, the more of a deductible limit that you have.
8. Gambling Losses
If your gambling losses didn’t exceed your gambling income, then you can itemize your losses. When filing this deduction, you will use Schedule A, like with other itemized deductions.
However, when reporting your gambling losses, you must keep a record of your wins and losses. Moreover, your records have to include where, when, and who you gambled with. You will also have to include the type of gambling that took place. For instance, sports betting or lotteries.
These deductions are other expenses that you may find yourself encountering. These include services and products that further your career, items or services you have to pay out-of-pocket for at your job, or other expenses.
However, the deduction is not much—you can only deduct expenses that exceed 2% of your adjusted gross income.
Moreover, to qualify for these deductibles, you must be a performing artist, a government official working on a fee basis, or an armed forces reservist. Or, you have to be an employee with impairment-related expenses.
To claim these expenses, if you qualify, you must complete Form 2106.
If you are an eligible educator, you can fill out Schedule 1 and deduct up to $250 in unreimbursed expenses. Some qualifying expenses could include classroom supplies.
Filing Itemized Deductions: How Do You Claim Them?
While you fill out your 1040, you will encounter a question asking you whether you prefer taking the standard deduction or if you prefer itemizing your deductions. If you decide to itemize, you must fill out a separate form, which is Schedule A.
From there, you will use Schedule A to calculate your itemized deductions.
However, this form will walk you through each step on how to calculate each expense. Once you finish your calculations, you will want to double-check the numbers you entered. Then, finally, enter your calculations into your 1040 form.
Should You Itemize Your Deductions?
If you have itemized deductions that exceed the amount of your standard deduction, then you’re better off itemizing your expenses. However, you will need to fill out Schedule A and other forms when itemizing your deductions, depending on what you want to claim.
The varying itemized deductions that you can claim on your taxes give you more flexibility with saving on your taxes. But you will need to make sure that you qualify for the deductions. Otherwise, you are potentially setting yourself up for a headache if you get audited.
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