How To Know When You Should Itemize Your Taxes
A tax deduction reduces a taxpayer's taxable income, which could, in turn, lower their tax liability. Each tax season, taxpayers are presented a choice: take the standard deduction or itemize. Based on IRS data, most people (close to 90%) claim the standard deduction on their returns. Of course, that's not 100%, and you may fall in this other group of taxpayers who choose to itemize their deductions using Schedule A instead. What might lead taxpayers to itemize? Basically, you'd itemize deductions if doing so reduced your taxable income by a greater amount than the standard deduction would. For most, this isn't the case. However, as the Tax Foundation notes, taxpayers with higher incomes may find the difference is significant enough.
Another factor, however, is that itemizing is a more involved process, and one you need to plan for, as you'll need the receipts and other documentation, such as letters and financial statements, to back up what you choose to itemize in your return. The standard tax deduction, meanwhile, is the same for everyone based on filing status; in 2024, for tax year 2023, the standard deduction for single filers is $13,850, $20,800 for heads of households, and $27,700 for married couples who file jointly. Further, for taxpayers 65 or older and/or blind, they may claim an additional deduction ranging from $1,850 to $3,000.
Itemizing, meanwhile, requires math and filling out the 18 lines in Schedule A accurately. It's this extra paperwork that makes itemizing not quite worth it for the majority of taxpayers today (though this will likely change after 2025), especially if the tax benefit of doing so is minimal.
Itemizing deductions on your tax return
According to the IRS, 87.6% of taxpayers claimed the standard tax deduction in 2019, followed by 87.3% of taxpayers in 2020. In 2020, the standard deduction per filing status was $12,400 for single filers, $18,640 for heads of households, and $24,400 for married couples who filed jointly. Compare those numbers to the average for total itemized deductions in 2020, $39,105, and you can see why some taxpayers choose to itemize. Even still, per the IRS, the number of taxpayers who itemized in 2020 suggested a downward trend, with a decrease of 10.5% returns.
As for what taxpayers can itemize, there are various categories, including mortgage interest, points, and insurance premiums; out-of-pocket medical and dental expenses; charitable donations (including gifted appreciated assets); and certain state and local taxes. Note, however, there are limits as to how much you can claim for each. For instance, for state/local taxes, the deduction is limited to $10,000. For out-of-pocket medical expenses, the deduction only begins once the amount exceeds 7.5% of a taxpayer's adjusted gross income (AGI). For example, if your AGI is $70,000 and your expenses for health care totaled $7,000, you could claim a deduction of $1,750, or the difference between $7,000 and $5,250 (7.5% of $70,000).
Further, if you itemize, remember you'll need documentation like receipts, not only to complete Schedule A but to support your claimed deductions should the IRS ask to take a closer look at your tax return in the future.
More on the standard tax deduction today
As said, if you want to itemize, you'll need the supporting documents to even consider this option, which means either keeping meticulous records throughout the year or tracking down what you need once tax season arrives. On the other hand, claiming the standard deduction requires no additional paperwork or calculations. What's more, the standard deduction today is far higher than it was prior to the Tax Cuts and Jobs Act (TCJA) of 2017, which nearly doubled the standard deduction for all filing statuses. Each year since, the standard deduction has gone up slightly more.
These temporary increases from the TCJA, which will expire on December 31, 2025, have surely factored into the number of taxpayers who've decided to take the standard deduction over itemizing in recent years. This said, another factor for many was likely the change from the TCJA regarding the state and local tax (SALT) deduction, which the 2017 tax law capped at $10,000. Prior to this, there was no cap, which made itemizing well worth it for many, especially residents of states with high personal income tax rates like California (at 14.4%) and Hawaii, New York, and New Jersey.
So, while nearly 90% of taxpayers choose to take the standard deduction today, we'll likely see a change once the TCJA expires at the end of 2025. Deciding between taking the standard deduction and itemizing won't be as simple for some taxpayers, as they do the math to determine which will reduce their taxable income the most.