What is an Itemized Deduction?
An itemized deduction is an expenditure on eligible products, services, or contributions that can be subtracted from adjusted gross income (AGI) to reduce your tax bill. Such deductions permit taxpayers who qualify to potentially pay less in taxes than if they opted to take the standard deduction, a fixed dollar amount that varies only by filing status. Allowable itemized deductions, sometimes subject to limits, include such expenses as mortgage interest, charitable gifts, and medical expenses.
How Tax Deductions Work
Tax deductions should not be confused with tax credits, which reduce your tax bill directly. For example, if you calculate your taxes due to be $14,000, and are then eligible for a $1,000 tax credit, your bill is simply lowered by the $1,000 figure, to $13,000.
Deductions, by contrast, reduce your taxable income, with the actual tax relief dependent on the tax bracket in which that income places you. As an example, consider a person filing single, unmarried, who has a gross income of $80,000 and is claiming itemized deductions totaling $10,000. Subtracting those deductions from gross income yields a taxable income to $70,000. The actual tax relief in this instance is the deducted amount, $10,000, times the tax rate for a single person in that income bracket, which is 22%. The amount of tax saved through the deductions, then, is $2,200.
Starting in 2018, the doubling of the standard deduction made itemizing tax deductions less advantageous for many taxpayers.
Standard vs. Itemized
The vast majority of taxpayers have the option to either itemize deductions or claim the standard deduction that applies to their status. (Exceptions are nonresident aliens, who must itemize, and married couples who are filing separately, who must both claim the same type of deduction.) The decision should hinge on a calculation of which deduction type lowers your tax liability the most.
If you're filing as a single taxpayer in 2019—or you're married and filing separately—you will likely be better off taking the standard deduction of $12,000 if your itemized deductions total less than that amount. The same applies to a married couple filing jointly who have no more than $24,000 in itemized deductions and heads of household whose deductions total no more than $18,000. These deductions almost doubled starting in 2018 after passage of the Tax Cuts and Jobs Act.
Each year, you must actively choose between itemizing or taking the standard deduction. You should always research that choice, since the allowable deductions and their amounts sometimes change from year to year.
Tax Deductions You Can Itemize
Mortgage interest on a loan of $750,000 or less
Mortgage insurance premiums
Medical and dental expenses (over 10% of AGI)
State and local income, sales and personal property taxes up to $10,000
$2,500 in student loan interest
$250 (for educators buying classroom supplies)
Deductions You Lost
Mortgage interest: loan amounts from $750,000+ to $1 million
State and local income, sales and personal property taxes beyond $10,000
Moving expenses (except active-duty military)
Unreimbursed employee expenses
Natural disaster losses (unless in an area designated by the president)
Which Expenses Can Be Itemized?
The list of expenses that can be itemized in 2019 is extensive, but there are limits and exclusions compared to deductions before the Tax Cuts and Jobs Act went into effect. You can, for example, deduct mortgage interest on a loan of $750,000 or less for any home bought on or after Dec. 15, 2017. Previously, you could deduct interest on a mortgage of $1 million or less. (You can still refinance a home under the old rules if it was purchased before Dec. 15, 2017.)
You can also deduct mortgage insurance premiums (MIPs); charitable donations up to 60% of AGI; medical and dental expenses over 10% of AGI; state and local income, sales and personal property taxes up to $10,000 ($5,000 if married filing separately); gambling losses and investment interest; $2,500 in student loan interest and $250 if you are an educator who buys supplies for your classroom.
Some formerly available itemized deductions went away as of 2018. Those include deductions for alimony payments, moving expenses (except for active-duty military moving due to military orders), unreimbursed employee expenses, job-hunting expenses, tax preparation expenses and natural disaster losses (unless a tax break for a specific event is authorized by the president). Home-equity loan debt was also affected, in complicated ways: If you have a home-equity loan or line of credit, check with your tax advisor about whether the interest is deductible.
Also, there was previously no limit on deductions for state and local taxes (SALT). The current $10,000 limit has has been serious financial hit to taxpayers living in high-tax states.
Itemized deductions are listed on Schedule A of Form 1040. What's more, you must save all receipts in case the IRS asks to see them. Additional proof of expenses could include bank statements, insurance bills, medical bills, and tax receipts from qualified charitable organizations.