Itemized tax deductions give many American wage earners a chance to pocket more income, rather than hand over their hard-earned cash to the government. For those who keep good records, deductions have long meant more money for them and less for the Internal Revenue Service (IRS).
- Itemizing your tax deductions may allow you to keep more of your income.
- Missing an itemized deduction can cost you refund dollars.
- Changes to tax deductions based on the 2017 Tax Cuts and Jobs Act have eliminated some expense deductions while allowing others to be itemized.
- Work-related expenses, homeownership, and charitable giving are all easy ways to rack up deductions.
- The new law eliminated certain deductions, such as unreimbursed job expenses and tax preparation fees, but you can still deduct gambling losses and student loan interest.
Tax Cuts and Jobs Act Rule Changes
Ever since the Tax Cuts and Jobs Act of 2017 (TCJA), the decision to itemize has come with a big caveat. Before you go to the trouble of filling out that Schedule A form, keep in mind that the standard deductions, which increased significantly in 2018, have all been bumped up a bit more.
The standard deduction for individuals is $12,550 and married individuals filing separately, $18,880 for heads of household, and $25,100 for married couples filing jointly or qualifying widow(er)s in 2021. For the 2022 tax year, the standard deductions total $12,950, $19,400, and $25,900 respectively.
Note that the TCJA also did away with the personal exemption, so you should factor that into your calculations. The law also eliminated or changed the rules for a number of tax deductions that you were able to take in 2017. On the other hand, the TCJA no longer limits overall itemized deductions according to your adjusted gross income (AGI), which is at least one positive change for itemizers.
If your total itemized deductions under the new tax bill fall below the amounts listed above, you’re likely better off taking the standard deduction. If not, read on to learn about the most overlooked itemized deductions and how they can help you save even more.
Deducting Your Home Sweet Home
Owning a home can give you hefty tax write-offs each year, including for points paid when you bought the home and possible deductions for mortgage interest. You can also deduct property taxes paid during the time you live in your home. Here are the caveats: For mortgages taken out on or after Dec. 15, 2017, the new tax law lets you deduct interest on loan amounts up to $750,000 (for older loans, the limit is $1 million).
Taxpayers are also limited to a $10,000 deduction ($5,000 if married filing separately) for state and local taxes (SALT), which is a combination of property taxes plus either state and local income taxes or sales taxes. The deduction for private mortgage insurance premiums has been brought back through the 2020 tax year. You also get some tax benefits when you sell your home. For instance:
- You can deduct property taxes and mortgage interest you paid for the portion of the year before you sell.
- If you are active-duty military, you can even deduct your moving expenses.
- You can also deduct the fees you incur to unload your home, any commission you paid to a real estate agent, and any fees you paid at closing, such as legal or escrow fees, as well as the costs of repairs or improvements.
But these aren't really tax deductions—they're deducted from the sale price, which helps lower your gain and reduce your capital gains tax.
Please note, if your home loan is over the $750,000 (or $1 million) limit, you can still deduct the mortgage interest related to the portion of your loan up to that amount.
Driving Home a Tax Break
You pay a sales tax on your car when you buy it. Some states continue to tax you each year for, as Kentucky puts it, “the privilege of using a motor vehicle upon the public highways.” Most states also send out a notice to demand their tax payment to register your car each year. After you slap your new decal on your car, you may be able to file the receipt and add that payment to your deductions for personal property taxes in April.
If your state calculates a percentage of the vehicle registration based on the value of your car, you can deduct that percentage as part of your personal property taxes. The percentage of the vehicle registration based on the weight of your car is not tax-deductible. For example, in New Hampshire, a portion of car registration is deductible (the municipal portion which is calculated based on value) and a portion is not deductible (the state portion which is based on weight).
The same goes for an RV or boat—check the registration paperwork to see if you are paying property taxes on those, too, and keep in mind the $10,000 cap on total SALT taxes.
Doing Well by Doing Good
You donated your skinny jeans and wagon-wheel coffee table to Goodwill which, in turn, reduced your taxes by increasing your charitable deductions. The Internal Revenue Service (IRS) requires that you provide “a qualified appraisal of the item or group of items” when you make a physical donation worth more than $5,000. For items such as electronics, appliances, and furniture, you may need to pay a professional to assess the value of your donation.
Individuals can elect to deduct donations of up to 100% of their 2020 AGI (up from 60% typically). Corporations may deduct up to 25% of taxable income, up from the previous limit of 10%. Additionally, section 2204 of the CARES Act permits eligible individuals who do not itemize deductions to deduct $300 of qualified charitable contributions as an "above-the-line" deduction, i.e., as an adjustment in determining AGI, for the 2020 tax year.
Capital gains property donations, such as appreciated stock, are limited to 30% of AGI, and you may no longer claim a deduction for contributions that entitle you to college athletic seating rights.
Taxpayers who do not itemize their deductions are also allowed up to a $300 deduction for charitable contributions, thanks to the CARES Act. The 60% AGI limitation is suspended for itemizing taxpayers who donate to charity in 2021.
Traveling for Charity
If you’re the type of person who likes to donate your free time to volunteering and you dip into your own wallet to travel to your favorite charity, you can add those expenses to your charitable deductions (but not the value or your time or service). The primary purpose of the trip must be for charity, with no substantial element of a vacation. According to the IRS, to qualify, you must be "on duty in a genuine and substantial sense throughout the trip."
Whether you ride the bus or drive your own car, you'll need good records of your charitable activities: Keep receipts for public transportation or mileage logs for your car (for which you can charge the standard $0.14 per mile rate for charitable organizations), as well as receipts for parking and tolls.
Staying Healthy Gives Deductions a Leg Up
Staying healthy can cost you an arm and a leg. The IRS allows you a deduction specifically for medical expenses but only for the portion of expenses that exceed 7.5% of your AGI. So if your AGI is $50,000, you can only deduct the portion of your medical expenses that total over $3,750. If your insurance company reimburses you for any part of your expenses, that amount cannot be deducted. If insurance reimburses you in a future tax year for any portion of expenses claimed in the current year, you will need to add the reimbursement (up to the amount you took as a deduction) as income in the future year.
A portion of the money you pay for long-term care insurance can also minimize your tax burden. Long-term care insurance is a deductible medical expense, and the IRS lets you deduct an increasing portion of your premium as you get older, but only if the insurance is not subsidized by your employer or your spouse’s employer.
Another benefit is that you can deduct transportation and travel costs related to medical care, which means you can write off any bus, car expenses (at the standard mileage rate for medical purposes of $0.16 per mile), tolls, parking, and lodging (but not meals) as long as the total exceeds the 7.5% limit for 2021. Keep in mind that you can only deduct up to $50 per person per night of lodging.
You can also deduct any additional co-payments, prescription drug costs, and lab fees as part of your medical expenses—if the total exceeds the 7.5% limit for 2021. The IRS allows you to factor in common fees and services if they are not fully covered by your insurance plans, such as therapy and nursing services. In fact, the IRS’s definition of medical expenses is fairly broad and can include things like acupuncture and smoking cessation programs.
Contributions to health savings accounts (HSA) are tax-deductible. If you have a self-only high-deductible health plan (HDHP), you can contribute up to $3,600 to an HSA in 2021. If you have a family HDHP, you can contribute up to $7,200 in 2021. In 2022, the limits rise to $3,650 and $7,300 respectively.
Miscellaneous Deductions (What’s Left of Them)
The TCJA rules eliminate most deductions that previously fell under the category of “miscellaneous itemized deductions.” Many of these deductions were subject to a 2%-of-AGI threshold, meaning you could only deduct the amount that exceeded 2% of your AGI. Under the TCJA, the 2%-of-AGI threshold no longer applies, but you can no longer deduct the following:
- Unreimbursed job expenses, such as work-related travel and union dues
- Unreimbursed moving expenses, if you had to move in order to take a new job (exception: active-duty military moving because of military orders)
- Most investment expenses, including advisory and management fees
- Tax preparation fees (except for fees to prepare Schedules C, E, or F, which are considered to be deductible business expenses)
- Fees to contest an IRS ruling
- Hobby expenses
- Personal casualty or theft losses, except in federally designated disaster areas
Here's what you can still deduct:
- Gambling losses up to your winnings
- Interest on the money you borrow to buy an investment
- Casualty and theft losses on income-producing property
- Federal estate tax on income from certain inherited items, such as IRAs and retirement benefits
- Impairment-related work expenses for people with disabilities
- Student loan interest (limited to the lesser of $2,500 or total interest you paid in the year)
The Bottom Line
The slips of paper you cram into your wallet can mean more money in your bank account come tax season. Hold onto receipts for services and keep a file throughout the year, so you have a record of even the smallest expenses you incur for business, charity, and your health. As those expenses add up, they may eventually lower your tax bill.