What Are Itemized Tax Deductions? Definition and Impact on Taxes

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 lower the amount of taxes that you owe. Such deductions permit taxpayers who qualify to pay less tax than if they had opted to take the standard deduction—a fixed dollar amount that varies by filing status. Allowable itemized deductions, which may be 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 (TCJA) that went into effect in 2018.

Understanding Itemized Deductions

Itemized deductions reduce your taxable income. The actual amount that you save depends on your tax bracket. For example, consider an unmarried single filer who has a gross income of $80,000 and claims itemized deductions totaling $15,000. Subtracting those deductions from gross income yields a taxable income of $65,000. To figure out the actual tax relief, you would multiply the deducted amount ($15,000 in this case) by the effective tax rate for a single person in that income bracket.

Tax deductions should not be confused with tax credits, which directly reduce your tax bill. For example, if you calculate your taxes due to be $14,000, 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 your receipts in case the Internal Revenue Service (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. For example, if you file as a single taxpayer—or you’re married and filing separately—you will be better off taking the standard deduction of $12,950 for 2022 ($13,850 for 2023) if your itemized deductions total less than that amount.

Here are the standard deduction amounts for the 2022 and 2023 tax years:

Standard Deductions for 2022 and 2023
 Filing Status 2022 Standard Deduction 2023 Standard Deduction
Single $12,950 $13,850
Married Filing Separately $12,950 $13,850
Head of Household  $19,400 $20,800
Married Filing Jointly  $25,900 $27,700

Pros and Cons of Itemizing Deductions

Each year, you get to 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 adjusted gross income (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 (TCJA) went into effect.

For example, you can 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 up to $1 million. (You can still refinance a home under the old rules if it was purchased before Dec. 15, 2017.)

Usually, you can deduct charitable donations of up to 60% of your AGI (the exact percentage depends on the type of contribution and charity).

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 a home equity line of credit (HELOC), check with your tax advisor about whether the interest is deductible.

What Does It Mean to Claim Itemized Deductions?

When you file your income tax return, you can choose to either take the standard deduction—a fixed dollar amount based on your filing status—or itemize your deductions. Unlike the standard deduction, the dollar amount of itemized deductions varies by the taxpayer, depending on the expenses that they deduct on Schedule A of Form 1040. The total amount is subtracted from the taxpayer’s taxable income, and the remainder is your actual taxable income.

Which Expenses Can I Itemize?

You itemize your deductions on Schedule A of Form 1040. You can generally deduct unreimbursed medical and dental expenses, long-term care premiums, home mortgage interest, home equity loan (or line of credit) interest, charitable donations, certain taxes, casualty and theft losses, and some gambling losses.

Who Should Itemize Deductions?

You have the option to take the standard deduction or itemize your deductions. If the value of expenses that you can itemize is greater than the standard deduction, then it likely makes sense to itemize.

What Are the Standard Deduction Amounts for 2022?

For 2022, the standard deduction is $12,950 ($13,850 for 2023) for single and married filing separately taxpayers, $19,400 ($20,800 for 2023) for heads of households, and $25,900 ($27,700 for 2023) for married filing jointly filers and surviving spouses.

Article Sources
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  2. Internal Revenue Service. “Topic No. 501 Should I Itemize?

  3. Internal Revenue Service. “Tax Reform Brought Significant Changes to Itemized Deductions.”

  4. Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2022.”

  5. Internal Revenue Service. “Credits and Deductions for Individuals.”

  6. Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2023.”

  7. Internal Revenue Service. “Publication 936, Home Mortgage Interest Deduction.”

  8. Internal Revenue Service. “Charitable Contribution Deductions.”

  9. Internal Revenue Service. “Topic No. 502 Medical and Dental Expenses.”

  10. Internal Revenue Service. “Topic No. 503 Deductible Taxes.”

  11. Internal Revenue Service. “Publication 5307: Tax Reform Basics for Individuals and Families,” Pages 6–10.

  12. Internal Revenue Service. “With New SALT Limit, IRS Explains Tax Treatment of State and Local Tax Refunds.”

  13. Internal Revenue Service. “Interest on Home Equity Loans Often Still Deductible Under New Law.”

  14. Internal Revenue Service. “2021 Instructions for Schedule A.”

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