What are Itemized Deductions? 

Itemized deductions are specific expenses that taxpayers can list and deduct from their gross income to reduce their taxable income. Unlike the standard deduction, which is a fixed amount, itemized deductions allow you to deduct eligible expenses like mortgage interest, medical costs, charitable donations, and state and local taxes.

Key Takeaways 

• Itemized deductions reduce taxable income by allowing you to deduct specific qualifying expenses instead of taking the standard deduction. 
• Choosing to itemize can lead to greater tax savings if your total deductible expenses exceed the standard deduction amount for your filing status. 
• Like the standard deduction, itemized deductions are 'below-the-line,' reducing taxable income after Adjusted Gross Income (AGI) is calculated. In contrast, 'above-the-line' deductions, such as IRA contributions, lower gross income to determine AGI

How Deductions Shape Your Taxable Income 

Perhaps it’s best to start with how your income is calculated for tax purposes in the first place. Your gross income represents the total income you’ve earned from all sources—such as your job, investments, or rental properties. However, the IRS doesn’t tax you on every dollar you make. Instead, you can reduce your gross income by subtracting certain deductions to arrive at your taxable income—the amount used to calculate your tax liability.

Deductions fall into two main categories: above-the-line and below-the-line. The “line” here refers to your Adjusted Gross Income (AGI), which is your gross income minus above-the-line deductions. Above-the-line deductions include specific expenses like contributions to a traditional IRA or student loan interest, and they reduce your gross income before AGI is determined. For example, if your gross income is $90,000 and you claim $5,000 in above-the-line deductions, your AGI would be $85,000.

After calculating your AGI, you can reduce your taxable income further by claiming either the standard deduction or itemized deductions—both of which fall below the line. The standard deduction is a fixed amount determined annually by the IRS, while itemized deductions allow you to list eligible expenses like mortgage interest, state and local taxes, and charitable contributions. You can choose the option that provides the greater tax benefit, but not both.

Note: For 2024, the standard deduction amounts are $14,600 for single filers, $29,200 for married couples filing jointly, and $21,900 for heads of household. 

Common Itemized Deductions 

If you decide to itemize, here are the main deductions available:

• Medical and Dental Expenses: You can deduct medical and dental expenses that exceed 7.5% of your AGI. For instance, if your AGI is $85,000, you can only deduct expenses beyond $6,375. This includes out-of-pocket costs like doctor visits, prescription medications, and necessary medical equipment.
• State and Local Taxes (SALT): You can deduct state and local property taxes, plus either income taxes or sales taxes, but there's a combined cap of $10,000. This limit applies whether you're single or married filing jointly.
• Mortgage Interest: If you have a mortgage on your primary home or a second home, you can generally deduct the interest paid on up to $750,000 of qualified residence loans (or $375,000 if married filing separately). This limit applies to mortgages taken out after December 15, 2017—older mortgages may qualify for the previous $1 million cap.
• Charitable Contributions: Donations to qualified charitable organizations are deductible, including both cash and property donations. Keep good records—you'll need documentation for all contributions, and appraisals for donated items worth over $5,000.
• Casualty and Theft Losses: These are now only deductible if they occur in a federally declared disaster area. If you qualify, you can deduct losses exceeding $100 per incident, after subtracting any insurance reimbursement.
• Investment Interest: You can deduct interest paid on loans used to purchase taxable investments, but only up to the amount of your net investment income for the year. Any excess can carry forward to future years.
• Gambling Losses: You can deduct gambling losses, but only up to the amount of your gambling winnings reported for the same year. Make sure to keep detailed records of both wins and losses.

Who Should and Shouldn't Itemize? 

Itemizing typically makes sense for:

• Homeowners with substantial mortgage interest, especially on newer mortgages
• Residents of high-tax states who hit the $10,000 SALT cap
• People with significant medical expenses relative to their income
• Regular charitable donors whose total deductions exceed the standard deduction
• High-income earners who can benefit from multiple deduction categories

On the other hand, the standard deduction might be better for you if:

• Your total deductible expenses are less than the standard deduction
• You prefer a simpler tax filing process
• You don't have detailed records of your expenses
• You rent your home and live in a low-tax state

Note: If you're a higher-income taxpayer, be aware that some itemized deductions may be reduced or eliminated based on your income level. Additionally, certain deductions might trigger the Alternative Minimum Tax (AMT), which could affect your overall tax liability, although the Tax Cuts and Jobs Act of 2017 has significantly reduced the AMT’s impact on individual taxpayers.