Should I itemize deductions on my tax return or not?
A standard deduction is what taxpayers get if they choose not to itemize. The standard deduction amount changes every year. It also is different whether you are single, you're married filing separately, you're married filing jointly, you're a senior or you're head of household.
Its not the same amount for everybody but everybody does get the choice of whether they take the standard deduction or they can itemize. Whichever one is more favorable you get to use on your tax return so the question about should you itemize or not really depends on does the itemized deduction approach get you a larger deduction than the standard deduction approach?
If the standard deduction gets you a larger deduction, then why would you not choose that instead of an itemized deduction approach?
The vast majority of Americans statistically, do not itemize, because the Tax Cuts and Job Act (TCJA) under President Trump in 2018 raised the standard deduction threshold significantly and so that many people who might have itemized before 2018 actually get a larger deduction than they would have gotten.
Because of the TCJA a lot of people who used to itemize no longer need to as long as those rules stay in place. But remember, those tax rules are set to expire in 2025. Unless Congress does something to change them they are expected to reset to pre-2018 but at this point nobody knows what will happen.
What expenses qualify for itemizing deductions to lower your taxable income?
The single largest one is usually mortgage interest expense that usually pushes someone into itemized deduction territory. But perhaps your mortgage interest has decreased to a point where maybe you used to itemize but now its not large enough to do it.
Followed by mortgage interest is normally state and local taxes, usually withheld from your paycheck but could be payments for other reasons. This is normally capped at $10,000 per the TCJA.
Following those two is often charitable contributions and then medical deductions.
Most people we work with do not actually get the deductions for medical related expenses due to thresholds that need to be crossed.
If you are a tax filer that typically gets the standard deduction but you anticipate larger infrequent expenses you might be able to plan to switch from one approach to another. For example if you anticipate a large medical expense perhaps you can change the timing of the payment to pull next year payments into this year to push you across into itemizing deductions or delay this year’s payments into next year’s payments to achieve the same effect.
Or perhaps you can make charitable contributions in a larger amount to your preferred charities or to a Donor Advised Fund to get an itemized tax deduction but still control the timing of those contributions.
Another overlooked area is itemized deductions at the state income tax return.
You may not get to itemize at the federal level, but state tax return deductions thresholds are different and so you might possibly get a state tax deduction. Also under the TCJA a category of deductions called unreimbursed employee business expenses doesn’t exist in the federal return but still does for the Hawaii state tax return. This is an overlooked area of deductions too.
How do you capture the data to use as possible itemized deductions? That where good recordkeeping comes in. Junk record keeping often leads to a junk tax return due to missing information.
If you feel you need a better method of recordkeeping reach out as part of an initial consultation for your financial planning.
The information in this and other articles is intended to be educational in nature only. Not tax, legal or investment guidance for you specifically. Each person’s situation is unique and you must seek appropriate professional guidance that can address your unique situation.
Schedule a free initial consultation call with Matt