How Itemized Deductions Work

Don’t worry – the Internal Revenue Service (IRS) doesn’t want to tax every last cent you earn. That’s where deductions come in. In fact, the agency offers a standard tax deduction — a gift! — to all taxpayers based on their filing status.

Standard deduction rates

Here are the standard deduction rates for the 2023 and 2024 tax seasons:

However, depending on your finances, itemizing tax deductions may lower your tax burden even further.

Understanding itemized deductions

Written into the tax code are allowances for all kinds of deductible expenses. When you itemize deductions on your federal income tax return (the famous Form 1040), you attempt to claim legal deductions that add up to more than the standard deduction. This is done in hopes that you get a bigger refund or have a smaller tax bill. If you’re unsure which method would be most beneficial for you, check out Should I Itemize or Take the Standard Deduction?

Before itemizing your deductions, just remember that it requires careful financial record-keeping and a close reading of the tax rules. However, going this route can pay off come the April tax deadline.

Most common itemized deductions

Mortgage interest

This is a great benefit for homeowners whose monthly mortgage checks include huge chunks of interest. You can deduct 100% of the mortgage interest you paid by itemizing deductions. For more information, check out our article on the interest expense deduction.

State and local tax deduction (SALT)

This one makes sense — why should the federal government tax you on earnings you’ve already spent on state and local taxes? This deduction has its limitations, however. From the 2018 tax year on, the maximum SALT deduction became $10,000. Residents can choose to deduct sales tax in the eight states with no income tax.

Charitable gifts and donations

As a way of rewarding charitable giving, the IRS lets taxpayers deduct the cash value of donations given to tax-exempt charity charities. The charitable giving deduction is generally capped at 60% of your adjusted gross income (AGI).

Medical and dental expenses

The IRS recognizes the high cost of health care and allows a partial deduction of out-of-pocket medical expenses (not health insurance premiums). The deduction covers the portion of medical expenses that exceed 7.5% of your income.

Additional deductible expenses

You can also deduct other costs, like theft and casualty losses and gambling losses.

In some instances, you can deduct non-reimbursed job expenses. To do so, you must fall into one of the following categories: Armed Forces Reservists, qualified performing artists, fee-basis state or local government officials, or employees with impairment-related work expenses.

Limits to itemized deductions

The generosity of the IRS does have its limits, however. The tax code applies floors, ceilings, and phase-outs for certain itemized deductions:

• Floors set a minimum amount at which you can start deducting certain expenses, such as medical expenses over 7.5% of AGI. That 7.5% is the floor.
• Ceilings impose a limit on specific categories of itemized deductions, like the limit on charitable deductions to 60% of AGI.

Additionally, you can only deduct 50% of business-related meals and entertainment costs. For a brief time during the pandemic, certain restaurant meals were 100% deductible, but that is no longer the case for tax year 2024.

If you earn or lose money gambling, gambling losses can’t exceed your gambling winnings.

The bottom line

Whether you choose to itemize your deductions or take the standard deduction, it’s important to understand how each option can impact your tax return. While the standard deduction is simple and generous, itemizing can provide additional savings if your eligible expenses exceed the standard amount. Just be sure to keep good records and stay on top of tax rules to maximize your potential deductions!

This article is for informational purposes only and not legal or financial advice.