Understanding Itemized Deductions vs. Standard Deduction: Making the Right Choice
Understanding Itemized Deductions vs. Standard Deduction: Making the Right Choice
Whether you file your tax returns on your own or work with a tax professional, you're probably familiar with the idea of tax deductions. Generally speaking, tax deductions are expenses you incur throughout the year that may be deducted—i.e., subtracted from your taxable income, lowering the amount of tax you pay.
When you file your federal income tax return, you must choose whether to itemize deductions or take the standard deduction. The decision can significantly impact the complexity of your tax return and your final tax bill.
In this article, we'll explain these options to help you make an informed decision.
What Is the Standard Deduction?
The standard deduction is a fixed dollar amount to reduce taxable income. It's available to all taxpayers and varies depending on your filing status—single, married filing jointly, married filing separately, or head of household.
The Internal Revenue Service (IRS) adjusts the standard deduction amount for inflation each year.
For the 2024 tax year, the standard deduction is:
- $14,600 for single and married filing separately (up from $13,850 in 2023)
- $29,200 for married couples filing jointly (up from $27,700 in 2023)
- $21,900 for head of household (up from $20,800 in 2023)
The benefit of the standard deduction is its simplicity; it doesn't require you to save receipts or detail your deductions.
What are Itemized Deductions?
Itemized deductions, on the other hand, are a collection of eligible expenses that you can subtract from your adjusted gross income. Common itemized deductions include:
- Out-of-pocket medical and dental expenses. If your out-of-pocket medical expenses exceed 7.5% of your adjusted gross income, you can claim them as an itemized deduction. Medical expenses include prescriptions, doctor co-pays, health insurance premiums, lab fees, eyeglasses and contact lenses, hospital stays, and more. You can find a more detailed list of potential expenses in IRS Publication 502.
- State and local taxes (SALT). You can deduct state and local income taxes, sales taxes, and property taxes. However, the total deduction for state and local taxes is capped at $10,000 per year.
- Mortgage interest. This includes mortgage interest on the first $750,000 of indebtedness on your primary residence and a second home if you own one. It also includes interest paid on a home equity loan as long as you used the proceeds to buy, build, or substantially improve the property. You can also deduct mortgage points and interest paid on money borrowed to purchase taxable investments.
- Charitable contributions. You can deduct donations to qualified organizations, including monetary and property donations. For any charitable donations worth $250 or more, you must have a written acknowledgment from the charity indicating the donation amount or a description of the property donated.
- Casualty losses. If you suffer property damage due to a federally declared disaster, such as a wildfire, flood, or hurricane, you can include the loss when itemizing deductions. However, you can't deduct losses covered by insurance.
- Miscellaneous deductions. Miscellaneous itemized deductions include a few other, less common deductions, including gambling losses (to the extent of gambling winnings), amortizable bond premiums, and impairment-related work expenses for a disabled person. Please note, the IRS does not currently permit miscellaneous deductions. However, these deductions are expected to be reinstated for tax years beginning January 1, 2026.
Itemizing tax deductions requires more effort as you need to document each deductible expense throughout the year and report the totals on Schedule A, which gets filed with your Form 1040 tax return.
Standard Deduction vs. Itemized Deductions: Which Should You Claim?
Choosing between the standard and itemized deductions depends on which lowers your taxable income the most.
Here's a simple guide:
- Calculate your itemized deductions. Gather all receipts and records of eligible expenses, including your medical expenses, mortgage interest, charitable donations, real estate taxes, personal property taxes, etc. Add up your total itemized deductions (capping your state and local taxes at $10,000).
- Compare your itemized deductions to your available standard deduction. Check the standard deduction amount for your filing status.
- Choose the higher amount. If your itemized deductions exceed the standard deduction, itemizing will save you more in taxes. Otherwise, go with the standard deduction.
If your total itemized deductions are close to the standard deduction available for your filing status, you can do some tax planning to boost your itemized deductions. For example, you might want to bunch two or three years’ worth of charitable donations into one year or pre-pay your state income taxes or property taxes.
However, make sure you discuss these strategies with your tax advisor first. Like most sections of the tax code, itemized deductions come with many rules, limits, and exceptions. Your tax pro can ensure you don't run into any unforeseen issues.
Remember, itemizing requires meticulous record-keeping and can be more time-consuming. It's often beneficial for homeowners, individuals with significant unreimbursed medical bills, or those who make large charitable contributions.
Understanding Adjustments to Income: The Power of Above-the-Line Deductions
In addition to choosing between standard and itemized deductions, there's another crucial component in the tax equation: adjustments to income, commonly known as "above-the-line" deductions. These deductions are beneficial as they directly reduce your adjusted gross income (AGI), and you can claim them regardless of whether you itemize or opt for the standard deduction.
What Are Above-the-Line Deductions?
Above-the-line deductions are certain expenses that the IRS allows you to subtract from your gross income. These deductions are called "above-the-line" because you deduct them before calculating your AGI on your tax return – literally above the line where your AGI appears on IRS Form 1040. Lowering your AGI can reduce your taxable income and potentially qualify you for other tax benefits and deductions that phase out at higher income levels.
Some common examples of above-the-line deductions include:
- Educator expenses: Teachers and eligible educators can deduct up to $300 spent on classroom supplies. Two married teachers filing a joint return can deduct up to $300 each for a maximum deduction of $600.
- Health Savings Account (HSA) contributions. Contributions to your HSA are deductible as long as you made them directly—i.e., not through pre-tax payroll withholding. For 2024, you can contribute up to $4,150 for self-only coverage or $8,300 for family coverage. If you're 55 or older, you can make an extra $1,000 catch-up contribution.
- IRA contributions: You may be able to deduct contributions to a traditional IRA. For 2024, the maximum IRA contribution is $7,000 ($8,000 if you're 50 or older). Keep in mind that your deduction may be limited if you or your spouse are covered by a retirement plan at work.
- Student loan interest. You can deduct up to $2,500 of interest paid on qualifying student loans. That deduction phases out if your modified AGI is more than $75,000 if single or $155,000 if married filing jointly.
- Alimony payments. You can deduct payments made under divorce or separation agreements. However, this applies only to agreements executed or modified prior to 2018.
- Self-employed deductions. This includes self-employed health insurance, half of the self-employment tax, and contributions to a SEP-IRA, SIMPLE IRA, or another qualified plan.
- Moving expenses. Members of the armed forces on active duty who receive a military order to move for a permanent change of station can deduct their unreimbursed moving expenses. This can include the cost of moving household goods and personal effects, storage, and traveling expenses.
- Penalties on early withdrawal of savings. If you paid penalties for withdrawing funds from a Certificate of Deposit (CD) or another savings vehicle before it matures, you can deduct these penalties.
This is a partial list of potential adjustments to income. You can find more in the Instructions for Schedule 1 included in the Form 1040 Instructions.
As always, it's a good idea to work with a tax professional to get personalized advice and to ensure you're maximizing your available tax benefits.
Don't Navigate These Decisions Alone
Deciding between the standard deduction and itemizing is a crucial aspect of tax planning. While the standard deduction offers simplicity and a guaranteed tax benefit, itemizing can lead to greater savings if you have substantial allowable deductions. Each taxpayer's situation is unique, and the best choice depends on your individual financial circumstances.
Fortunately, you don't have to make these decisions alone. Schedule a free consultation with Hood & Associates to explore your options and optimize your tax deductions. With expert guidance, you can ensure you're making the most financially sound decision for your situation.