Tax deductions can save you money on your tax bill, but you need to be smart about which ones you claim. Specifically, you'll have to decide whether you'd prefer to itemize deductions or claim the standard deduction.
To make that decision, it’s important to know how itemized deductions work and how much yours are worth. This guide will help you decide whether itemizing deductions makes sense for you — and help you figure out how to itemize if it makes sense to do so.
What are itemized deductions?
Itemized deductions are specific expenses you can subtract from your adjusted gross income. Deductions reduce the amount of the income you owe taxes on, thus lowering your tax bill.
When you prepare your income tax return, you are allowed to subtract certain deductions. There are two different kinds of deductions to be aware of:
- The standard deduction: a flat amount determined by filing status that anyone can claim
- Itemized deductions: deductions for money you paid for qualifying deductible expenses. For most people, the biggest deductible expenses are interest on a mortgage; state and local taxes including state income and property tax; charitable gifts; and medical or dental expenses.
Types of itemized deductions
The expenses listed below are all deductible under certain circumstances, but only if you itemize on your taxes. The best tax software can help you to identify all of your itemized deductions, but it's still helpful to understand the most common types when you're figuring out how to manage your money.
Home mortgage interest
If you have a home loan, you are allowed to deduct mortgage interest. With most tax filing statuses, you can deduct interest on loans valued at up to $750,000. However, if you're married filing separately, you can deduct interest on up to $375,000 in mortgage debt. If you borrowed prior to Dec. 16, 2017, the limits are $500,000 for married separate filers and $1 million for other tax filers.
Medical and dental expenses that exceed 7.5% of your AGI
You're allowed to deduct the portion of your medical and dental expenses above 7.5% of your AGI. Let’s say your income is $50,000 and you incur $4,000 in medical expenses. Because 7.5% of your income equals $3,750, you are allowed to deduct $250 of your medical expenses.
Property, state, and local income taxes
If you pay state income tax, property taxes, or taxes to your city or town, you can deduct up to $10,000 of the amount you paid from your federal income taxes.
You have the option to deduct sales tax or state and local income taxes paid. If you want to claim the deduction for sales tax instead of state and local taxes, you're still subject to the $10,000 limit applicable to your sales and property tax. You can keep your receipts and deduct the total amount of sales tax you paid, or can use the IRS sales tax calculator to estimate the amount.
Donations to eligible organizations can be deducted, but you'll need to make sure to keep a record. In 2020, you are also allowed to claim a deduction for up to $300 in charitable contributions even without itemizing.
Casualty and theft losses as a result of a federally declared disaster
If you experienced a loss of your home, household items, or vehicles because of a federally-declared disaster, you're allowed to deduct the value of your losses. However, if you were reimbursed for your losses by insurance, you cannot deduct any losses your insurance company compensated you for.
Investment interest expenses
If you borrow money to make an investment, you're typically allowed to deduct the amount of interest you pay on the loan. An investment is something that could be expected to produce income, such as dividends or interest, or something you expect to appreciate in value so you can sell it at a profit later. (Just keep in mind all investments come with the risk of loss.) The deduction for investment interest expense is commonly used when you buy investment property using a mortgage loan.
You are allowed to deduct gambling losses, but only to offset income from gambling wins. As a result, you can't claim a deduction exceeding the amount of gambling income you report. If you lost $3,000 but won $1,000, you could only declare $1,000 of your losses to avoid having to pay taxes on your winnings.
Under the old tax laws, you could claim a variety of miscellaneous deductions; however, the total value of the miscellaneous deductions had to exceed 2% of income before claiming deductions was allowed. Examples included unreimbursed employee expenses, tax preparation fees, and certain business expenses like tools used to do your job, work-related transportation, and union dues.
The Tax Cuts and Jobs Act, passed in 2017, eliminated the ability to claim these miscellaneous deductions. However, you might be able to claim them again in 2025 when provisions of the act expire.
Itemized deduction vs. the standard deduction: Which makes sense for you?
Deciding whether to itemize or claim the standard deduction is one of the most important parts of learning how to file taxes.
If you have a lot of the expenses above, itemizing on your tax returns might make sense. But most people don't itemize because the Tax Cuts and Jobs Act increased the standard deduction. If the amount of the standard deduction exceeds the total value of potential itemized deductions, it doesn’t make sense to itemize because you could reduce your taxable income more by claiming the standard deduction
The table below shows the standard deduction amounts by filing status in 2020 and 2021.
|Filing status||2020 tax year standard deduction||2021 tax year standard deduction|
|Married filing jointly||$24,800||$25,100|
|Married filing separately||$12,400||$12,550|
|Head of household||$18,650||$18,800|
That means if you are a single filer, your mortgage interest; state and local taxes; deductible medical expenses; and other deductions would all need to exceed $12,400. Otherwise, you'd want to claim the standard deduction instead of itemizing.
How to itemize deductions on your taxes
If you plan to itemize, you will need to include a Schedule A tax form with your tax return along with your 1040 form. Completing a Schedule A form is pretty easy. It has a breakdown of the different deductions you can claim, including:
- Medical expenses: You'll need to complete boxes 1, 2, 3, and 4 on Schedule A if you want to deduct medical and dental expenses. These boxes ask for the amount of your expenses, your AGI, and the difference between your expenses and 7.5% of your AGI.
- Taxes paid: If you're deducting state and local income taxes or sales tax, or if you're deducting real estate tax, you'll need to complete boxes 5A through 5E and box 6 and 7 on Schedule A. These boxes are used to list the different state, local, and property taxes you paid and determine whether they are above or below the $10,000 limit.
- Interest paid: When deducting mortgage interest, you'll need to complete boxes 8A through 8E, as well as box 9 and 10. In these boxes, you'll list mortgage interest and points reported to you as well as mortgage insurance premiums.
- Charitable giving: If you've made charitable contributions to deduct, those will be listed in boxes 11, 12, 13, and 14. You'll input the amount of money donated by cash or check; as well as the value of other gifts and any charitable deductions from prior years that you didn't get to claim.
- Casualty and theft losses: The amount of losses you're deducting that were caused by a federally-declared disaster should be included in box 15.
- Other deductions: Here, you'll list any other deductions you're claiming in box 16 and provide a list of the deductions on your form.
Finally, in box 17, you will add up the amounts from boxes 4, 7, 10, 14, 15, and 16. This will give you the total value of your itemized deductions.
You'll need to be sure to keep receipts and documentation to back up the amount you've listed on this form in case you get audited. Not doing so could be one of the biggest tax mistakes. But you don't need to send all this paperwork to the IRS with your returns. In other words, the IRS doesn't expect you to send in your medical bills if you're claiming the medical expense deduction, but you might have to provide those bills if the IRS audits you.
FAQs about how to itemize deductions
Is it worth itemizing deductions in 2021?
It is worth itemizing deductions in any tax year when the amount of your itemized deductions exceeds the value of the standard deduction. Doing so will allow you to save more money because your itemized deductions will provide a greater reduction in your taxable income.
In 2021, you will file your tax returns for the 2020 tax year. The standard deduction for the 2020 tax year is $12,400 for single filers or married separate filers, $24,800 for married joint filers, and $18,650 for heads of household. If your itemized deductions add up to more than these amounts, it's probably worth itemizing.
You will file your tax return in 2022 for income you earn in 2021. The standard deduction is higher in 2021, with single filers and married separate filers able to deduct $12,500; married joint filers able to deduct $25,100; and heads of household able to deduct $18,800. Unless your itemized deductions exceed these limits, it's probably not worth itemizing.
Do you have to itemize to deduct mortgage interest expenses?
If you wish to deduct mortgage interest expenses, you will need to itemize on your tax returns. You can deduct interest expenses on mortgage loans valued at up to $750,000 for all filing statuses except married filing separately. Married separate filers can deduct interest on loans valued at up to $375,000.
What can you itemize on your taxes?
Itemizing means claiming deductions for qualifying tax-deductible expenses. The expenses you can deduct if you itemize include mortgage interest; medical expenses exceeding 7.5% of income; charitable contributions; up to $10,000 of state and local income or sales tax as well as property taxes; investment income expenses; casualty and theft losses after a federally declared disaster; and gambling losses, but only to offset gambling wins.
The bottom line
Itemizing deductions is a little more complicated than claiming the standard deduction because you have to complete Schedule A and submit it with your tax returns. For most taxpayers, this won't matter because the standard deduction is worth more than the total amount of their itemized deductions. But if you pay a lot of local or state tax, property tax, or mortgage costs or if you donate a lot to charities, it might be worth itemizing.
If you aren't sure if you should itemize or don't know how to, talking with a tax professional is likely your best bet.