Itemized Deduction

What Is an Itemized Deduction?

An itemized deduction is an expense that can be subtracted from adjusted gross income (AGI) to reduce your taxable income and therefore reduce the amount of taxes you owe. Such deductions permit taxpayers who qualify to pay less in taxes than if they had opted to take the standard deduction—a fixed dollar amount that varies only by filing status. Allowable itemized deductions, sometimes subject to limits, include mortgage interest, charitable gifts, and unreimbursed medical expenses.

Key Takeaways

  • An itemized deduction is an expense that can be subtracted from adjusted gross income (AGI) to reduce your tax bill.
  • Itemized deductions must be listed on Schedule A of Form 1040.
  • Most taxpayers have the option to either itemize deductions or claim the standard deduction that applies to their filing status.
  • The type of expenses that can be itemized was drastically reduced by the Tax Cuts and Jobs Act that went into effect in 2018.

Understanding Itemized Deductions

Itemized deductions reduce your taxable income. The actual amount saved depends on the filer's tax bracket. For example, consider a person filing single, unmarried, who has a gross income of $80,000 and is claiming itemized deductions totaling $15,000. Subtracting those deductions from gross income yields a taxable income of $65,000. The actual tax relief in this instance is the deducted amount, $15,000, times the effective tax rate for a single person in that income bracket.

Tax deductions should not be confused with tax credits, which reduce your tax bill directly. If you calculate your taxes due to be $14,000, for example, and you are eligible for a $1,000 tax credit, your bill is cut by $1,000 to $13,000.

Itemized deductions are listed on Schedule A of Form 1040. You must save all receipts in case the IRS asks to see them if you are audited. Additional proof of expenses could include bank statements, insurance bills, medical bills, and tax receipts from qualified charitable organizations.

Starting in 2018, the doubling of the standard deduction made itemizing tax deductions less advantageous for many taxpayers.

Itemized Deduction vs. Standard Deduction

The vast majority of taxpayers have the option to itemize deductions or claim the standard deduction that applies to their status. (Exceptions are nonresident aliens, who must itemize, and married individuals 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 the 2021 tax year—or you're married and filing separately—you will likely be better off taking the standard deduction of $12,550 ($12,950 for 2022) if your itemized deductions total less than that amount.

Pros and Cons of Itemizing Deductions

Each year, you must 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.

Deductions You Can Itemize
  • Mortgage interest on the first $750,000 of indebtedness—or $1 million, if you bought the home before Dec. 16, 2017

  • Charitable contributions

  • Medical and dental expenses (over 7.5% of AGI)

  • State and local income, plus either personal property or sales taxes up to $10,000

  • Gambling losses

  • Investment interest

Deductions You Cannot Itemize
  • Mortgage interest on loan amounts over $750,000—unless you bought your home before Dec. 16, 2017

  • State and local income, sales, and personal property taxes beyond $10,000

  • Unreimbursed employee expenses

  • Tax-preparation expenses

  • Natural disaster losses (unless in a federally declared disaster area)

The list of expenses that can be itemized is extensive, but there are new limits and exclusions compared to deductions allowed 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. 16, 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.)

Typically, you can deduct charitable donations up to 60% of AGI, but for the 2020 tax year, the CARES Act temporarily suspended that limit, meaning you can deduct up to 100% of AGI for the 2020 tax year.

Also, you can deduct qualified, unreimbursed medical and dental expenses over 7.5% of AGI; state and local income or sales taxes plus real estate and personal property taxes up to $10,000 ($5,000 if married filing separately), gambling losses, and investment interest less than investment income.

Some formerly available itemized deductions went away as of 2018. Those include deductions for unreimbursed employee expenses, tax preparation expenses, and natural disaster losses (unless a tax break for a specific event is authorized by the president). There was previously no limit on deductions for state and local taxes (SALT). The current $10,000 limit has been a serious financial hit to taxpayers living in high-tax states.

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.

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