Should You Itemize Tax Deductions or Take the Standard Deduction?
As a 30+ year member of the AICPA, Nancy has experienced all facets of finance, including tax, auditing, payroll, plan benefits, and small business accounting. Her résumé includes years at KPMG International and McDonald’s Corporation. She now runs her own accounting business, serving several small clients in industries ranging from law and education to the arts.
Jennifer Agee has been editing financial education since 2001, including publications focused on technical analysis, stock and options trading, investing, and personal finance.
You know how people show up with giant boxes of receipts for their tax preparers? Those days may be almost gone. When the Tax Cuts and Jobs Act became effective back in 2018, the standard deduction was greatly increased. Many itemized deductions were restricted, and fewer people now need those boxes of receipts.
- Tax law changes in 2018 doubled the standard deduction, causing many Americans to switch from itemizing to taking the standard deduction.
- If you pay a lot in mortgage interest and/or state and local taxes (SALT), you might choose to itemize.
- For taxpayers who opt for the standard deduction, note that the $300 charitable donation tax credit from 2020 and 2021 has not been extended to 2022.
What Are Tax Deductions?
Tax deductions are amounts that you subtract from your income before calculating your federal taxes. (They differ from tax credits, which actually reduce the amount of tax that you have to pay.) On the first page of your tax return Form 1040, you start by listing your wages and other income. Further down the page, you’re allowed to take your choice of:
- The standard deduction. This is a specific amount that you deduct from your income depending on whether you’re a single filer, married, or a “head of household.”
- Itemized deductions. This is an amount you deduct from your income based on the total from a list of accepted or “qualified” deductions, such as mortgage interest, state and local taxes, charitable contributions, and certain medical expenses.
After the chosen deduction is subtracted, you’re left with your taxable income. Tax is calculated on that amount based on your income tax bracket.
Confused about tax brackets and marginal tax rates? Here’s an overview.
The IRS says that, in general, your federal income tax will be lower if you take the larger of either your itemized deductions or the standard deduction. You might be able to easily estimate whether your itemized deductions could possibly be bigger than the standard deduction (see below). If the standard deduction will be larger, there’s no need to calculate your itemized deductions—or save all those receipts.
What Is the Standard Deduction?
The IRS usually updates the standard deduction amounts annually. Here are the 2022 standard deduction amounts for each filing status:
- $12,950 for those single or married filing separately
- $25,900 for those married filing jointly or a qualifying surviving spouse
- $19,400 for a head of household
Note that if you’re blind, were listed as a dependent on someone else’s return, or if you were born before January 2, 1958 (for the 2022 tax year), different calculations are used to find your standard deduction.
What Are the Allowed Itemized Deductions?
Medical and dental expenses. Great! You mean I can deduct my medical and dental expenses from my income? Not so fast. First, there’s a whole list of items that are not approved. Second, you can’t deduct any insurance premiums that were already deducted from your paychecks.
And here’s the big kicker: You can only start deducting medical expenses once they’ve surpassed 7.5% of your adjusted gross income (AGI). You can’t include costs that were reimbursed to you by your insurance or paid by someone else.
For example, if your AGI is $100,000, you can only deduct medical expenses over and above 7.5%, or $7,500. So if your out-of-pocket medical expenses are $5,000, you can’t add any medical expense amount to your itemized deduction list.
If your AGI is $100,000 and your out-of-pocket expenses are $10,000, you could include $2,500 in itemized medical deductions ($10,000 – $7,500).
Taxes you paid. You’ve likely already paid some taxes, such as real estate tax (if you’re a homeowner), state income tax (if your state assesses one), and sales tax. Shouldn’t you get credit for that? Yes, you can deduct some of these taxes, but only up to $10,000 ($5,000 for those married filing separately). So even if your real estate taxes are $20,000 (hope your school system is good!), you can only deduct $10,000 total. To figure out a possible deduction, you’d add up:
- State and local real estate taxes.
- State and local personal property taxes (e.g. some states assess a tax on cars you own).
- Either state and local income taxes added together or sales taxes you paid.
If you choose to deduct your sales taxes, this is where the pile of receipts gets unwieldy again. You’d add up the actual sales tax you paid on food, clothing, medical supplies, and motor vehicles for the whole year. If you don’t want to add up all those items, you can use the IRS Sales Tax Deduction Calculator instead. If it turns out your state and local income taxes are greater than your sales tax, you can use those in your deduction calculation instead.
But remember, the maximum deduction for all of these taxes added together is $10,000.
Interest you paid. According to the IRS, the rules for deducting interest vary depending on the purpose of the loan (business, personal, or investment). But for itemized deductions, the form is generally talking about interest you paid on a mortgage for your home. There are limits depending on what year your mortgage was taken out, what the loan was used for (to purchase or improve your home), and if your loan exceeds the fair market value of your home. Most of the time, you can use the Form 1098 your lender provides to help in these calculations.
Gifts to charity. If you made a donation (of cash or property) to a qualified charitable organization (the IRS has a list, or you can ask the organization if they qualify), you may add that to your itemized deductions. The IRS has a list of rules for recordkeeping, receipts, and forms to fill out.
Casualty and theft losses. If you had a casualty loss from a federally declared disaster, you may fill out a form to calculate your itemized deductions.
Total Up the Itemized Deductions
Now that you’ve identified your allowed itemized deductions, add up the categories. How did you do? Are you over or under the standard deduction listed on your tax form? If you’re under, the IRS recommends that you take the standard deduction. If you’re over the standard deduction, lucky you! Under the Tax Cuts and Jobs Act, there is no limitation on total itemized deductions.
Are you on the cusp between itemizing and taking the standard deduction? It may help to “bunch” your charitable contributions. Take the standard deduction one year, hang onto your charitable receipts, and file them the next year when you itemize. Yes, it’s allowed.
Isn’t There an Extra Charitable Contribution Deduction?
For the tax years 2020 and 2021, tax filers were allowed to deduct up to $300 ($600 for married filing jointly) of cash charitable contributions they made, even if they took the standard deduction. This extra deduction is not available for 2022.
The Bottom Line
If you can eyeball your list of possible itemized deductions and know that you won’t reach the standard deduction, then you can avoid saving receipts for those items. And you’ll be far from alone—since the 2018 changes, upwards of 90% of tax filers have opted for the standard deduction. Before the Tax Cuts and Jobs Act, according to IRS stats, more than 30% of taxpayers itemized.
A simpler tax filing process and less paper cluttering our homes. Those are good things.
- Key Elements of the U.S. Tax System | taxpolicycenter.org
- Credits and Deductions for Individuals | irs.gov
- IRS Provides Tax Inflation Adjustments for Tax Year 2022 | irs.gov