The standard deduction is a preset amount that you are allowed to deduct from your taxable income each year. This amount will vary according to your tax filing status and is indexed annually to keep up with inflation.
For 2021 taxes, the standard deduction is $12,550 for singles ($12,400 for 2020), $18,800 for heads of household ($18,650 for 2020) and $25,100 for married filing jointly taxpayers ($24,800 for 2020). The standard deductions were nearly doubled with changes brought about by the Tax Cuts and Jobs Act (TCJA) for 2018.
- Itemized deductions help some taxpayers lower their annual income tax bill more than the standard deduction would provide.
- The surviving itemized deductions include several categories like medical expenses, mortgage interest, and charitable donations.
- Itemizing most often makes sense for higher-income earners who also have a number of large expenses to deduct.
Standard vs. Itemized Deductions
Prior to the passage of TCJA, millions of taxpayers were able to claim a larger deduction on their tax returns by itemizing their deductions. Thanks to the higher standard deductions, this may no longer be necessary.
To make the most out of your tax return, read on to learn when to itemize your deductions and when to stick with the standard deduction.
Between the 2018 and 2025 tax years, a change in the tax law nearly doubling the standard deduction has made itemizing tax deductions less advantageous for many taxpayers.
Between the 2018 and 2025 tax years, when the TCJA will be in effect, the number of taxpayers for whom itemizing will pay off is likely to drop significantly due to the much bigger standard deduction.
(Two caveats: The personal exemption disappeared with the TCJA, which may offset this effect for some. On the other hand, the child tax credit doubled and applies to more families, which will push some returns in the other direction.)
The new law also eliminated a number of deductions taxpayers could take previously and changed some others.
The Purpose and Nature of Itemized Deductions
Itemized deductions fall into a different category than above-the-line deductions, such as self-employment expenses and student loan interest. They are below-the-line deductions, or deductions from adjusted gross income (AGI). They are computed on the Internal Revenue Service’s Schedule A, and then the total is carried over to your 1040 form.
When itemized deductions have been subtracted from your income, the remainder is your actual taxable income. Itemized deductions were created as a social-engineering tool by the government to provide economic incentives for taxpayers to do certain things, such as buy houses and make donations to charities.
Which Deductions Can Be Itemized?
Schedule A is broken down into several different sections that deal with each type of itemized deduction. For a breakdown of your itemized deductions, see the IRS instructions for Schedule A.
The following is a brief overview of the scope and limits of each category of itemized deduction. To help with future planning, we’ve included key changes under the new tax law, which mostly started applying from tax year 2018 on:
Unreimbursed medical and dental expenses
This deduction is perhaps the most difficult—and financially painful for which one can qualify. Taxpayers who incur qualified out-of-pocket medical and/or dental expenses that are not covered by insurance can deduct expenses that exceed 7.5% of their adjusted gross incomes. This was originally scheduled to rise to 10% starting with the 2019 tax year (payable in April 2020). However, the 7.5% threshold will remain in place for the 2019 and 2020 tax years, thanks to an extension signed into law on Dec. 20, 2019.
Long-term care premiums
Long-term care premiums are calculated slightly differently than medical expenses are. Long-term care insurance premiums are tax deductible to the extent that the premiums exceed 10% of an individual's AGI. There is a deduction limit based on your age, and the insurance must be "qualified."
Homeowners can deduct the interest they pay on their mortgages and some home-equity debt.
Home mortgage interest
Home mortgage interest is deductible on the first $750,000 in loans. Each year, mortgage lenders mail Form 1098 to borrowers, which details the exact amount of deductible interest and points that they’ve paid over the past year.
Taxpayers who bought or refinanced homes during the year can also deduct the points they’ve paid, within certain guidelines. If the mortgage was originated before Dec. 16, 2017, then a higher limitation of $1 million applies. The higher limit still applies if you refinance that older mortgage, as long as the loan amount stays the same. For tax years after 2025, the $1 million limitation reappears regardless of when the loan was taken out.
Home-equity loan or line of credit interest
Home-equity loan/line of credit interest is deductible provided that the borrowed funds are used to buy, build, or substantially improve the home that secures the loan.
Taxpayers who itemize are able to deduct two types of taxes paid on their Schedule A. Personal property taxes, which include real estate taxes, are deductible along with state and local taxes that were assessed for the previous year.
However, any refund received by the taxpayer from the state in the previous year must be counted as income if the taxpayer itemized deductions in the previous year. Starting in 2018 until the end of 2025, taxpayers can deduct only $10,000 of these combined taxes. In addition, foreign real estate taxes (not related to a trade or business) are not tax deductible.
Also, if you prepaid your state or local income tax for next year, that amount is not deductible on your current year’s taxes.
Any donation made to a qualified charity is deductible within certain limitations. For cash contributions between 2018 and 2025, the amount that can be deducted is limited to no more than 60% of the taxpayer’s AGI. Excess amounts must be carried over to the next year. Other contributions can be limited to 50%, 30%, or 20% of your AGI, depending on the type of property and organization receiving your donation.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020, creates a new above-the-line deduction of up to $300 for charitable donations and relaxes limits on other charitable deductions to increase charitable giving during the COVID-19 pandemic. These include cash contributions and donations of food, and they apply both to individuals and corporations.
Casualty and theft losses
Any casualty or theft loss incurred as a result of a federally declared disaster can be reported on Schedule A. Unfortunately, only losses in excess of 10% of the taxpayer’s AGI are deductible after subtracting $100 from the loss amount. If a taxpayer incurs a casualty loss in one year and deducts it on their taxes, any reimbursement that is received in later years must be counted as income. Taxpayers must complete Form 4864 and report the loss on Schedule A.
Unreimbursed job-related expenses and certain miscellaneous deductions
Prior to the passage of the TCJA, workers incurring job-related expenses were able to deduct expenses that exceeded 2% of their AGI. Now, you must fall into one of four categories to be able to claim job-related expenses. You must be either an armed forces reservist, a qualified performing artist, a state or local government official working on a fee basis, or an employee with impairment-related work expenses.
Workers who fall into these categories and claim expenses must complete Form 2106. In addition, eligible educators may deduct up to $250 in unreimbursed expenses and can do so by completing Schedule 1.
Other Miscellaneous Deductions
This final category of itemized deductions includes items such as gambling losses to the extent of gambling winnings, losses from partnerships or subchapter S corporations, estate taxes on income in respect of a decedent (IRD), and certain other expenses. Some of these deductions are eliminated or changed from 2018 to 2025. For additional details, see IRS Publication 17 and the instructions for Schedule A. For the 2018 tax year and onward, check with your tax advisor.
Summary of Tax Law Changes
If you’re filing as a single taxpayer for the 2020 tax year—or you’re married and filing separately—you will likely be better off taking the standard deduction of $12,400 ($12,550 for 2021) if your itemized deductions total less than that amount. The same applies to a married couple filing jointly who have no more than $24,800 ($25,100 for 2021) in itemized deductions and heads of household whose deductions total no more than $18,650 ($18,800 for 2021).
These deductions almost doubled starting in 2018 after the passage of the TCJA.
Tax deductions you can itemize
- Mortgage interest of $750,000 or less
- Mortgage interest of $1 million or less if incurred before Dec. 16, 2017
- Charitable contributions
- Medical and dental expenses (over 7.5% of AGI)
- State and local income, sales, and personal property taxes up to $10,000
- Gambling losses
- Investment interest expenses
- $2,500 in student loan interest (these do not need to be placed on Schedule A but can be taken above-the-line and subtracted from your taxable income); income phaseout limits apply
- $250 (for educators buying classroom supplies)
Deductions lost because of TCJA
- Mortgage interest: loan amounts from $750,000+ to $1 million
- State and local income, sales, and personal property taxes beyond $10,000
- Alimony payments for divorce agreements after Dec. 31, 2018
- Moving expenses (except active-duty military)
- Unreimbursed employee expenses
- Tax-preparation expenses
- Natural disaster losses (unless in an area designated by the president)
Income Limitations for Itemized Deductions
Previously, taxpayers with AGIs above certain levels were subject to limits on how much they could claim in itemized deductions. These limits, known as the Pease limitations, are suspended from 2018 to 2025 by the TCJA.
Remember to Aggregate
There are times when the additional deduction realized from excess medical or job-related expenses will allow itemized deductions to exceed the standard deduction. Therefore, you should not simply assume you cannot deduct miscellaneous expenses or that you cannot itemize deductions if your itemizable deductions are insufficient by themselves for you to qualify.
The Bottom Line
Many rules concerning itemized deductions are beyond the scope of this article. Working with an experienced and competent tax preparer can help to ensure those rules are applied to your tax return. Your tax preparer should also be able to allow you to determine whether you should itemize or take the standard deduction. Be sure to take some time to review what to expect from 2018 through 2025 based on the new tax legislation.