What Are Itemized Deductions and How Do They Work?

You might save money filing with itemized deductions.

How much tax you owe depends on your income, but the IRS allows you to claim deductions that reduce your taxable income and the amount of tax you ultimately owe. Keep reading to learn about the two main types of deductions and how they can help you reduce your tax bill.

Itemized Deductions vs. Standard Deduction

Taxpayers can use the standard deduction or take itemized deductions on their tax returns, but they can’t do both. The standard deduction is a set dollar amount that reduces a taxpayer’s taxable income. With the standard deduction, the taxpayer need not prove or calculate tax write-offs. The amount of the standard deduction is predetermined by the IRS and available to most taxpayers regardless of whether they qualify for any specific tax deductions.

Itemized deductions require the taxpayer to selectively choose and calculate each deduction they qualify for. In some cases, the taxpayer must keep proof of the itemized tax deductions to claim them. Proof might include receipts for charitable contributions or a mileage log for business use of a car. The best deduction for you will depend on a number of factors.

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Learn: Best and Worst Ways to Itemize Deductions

What Is the Standard Deduction Amount?

The amount of the standard deduction was changed radically with the passing of the 2017 Tax Cuts and Jobs Act, nearly doubling the amount that can be taken for those who don’t itemize. For tax year 2018, the standard deduction for single filers and those who are married filing separately is $12,000. For married couples filing jointly, it is $24,000. If you file as head of household, your standard deduction is $18,000.

Taxpayers who are married and age 65 or blind get an additional $1,300 standard deduction each. If you’re single and 65 or blind, your additional deduction is $1,600. These amounts are unchanged from last year.

How Do You Itemize Deductions?

To itemize your deductions, you’ll need to complete and file Schedule A with your Form 1040. On Schedule A, you will fill in the amount of each deduction, which includes:

  • Medical and Dental Expenses:
    • You can deduct the amount that exceeds 7.5 percent of your adjusted gross income.
  • State and Local Taxes:
    • You can deduct up to $5,000 if married filing separate and up to $10,000 for all others.
  • Mortgage Interest and Points:
    • The deduction for mortgage loan interest is capped at the interest paid on loans of more than $1 million (For loans originated before December 15, 2017) or $750,000 (For loans originated after that date). These amounts are halved for single taxpayers. So you can deduct the interest you paid on $1 million or $750,000 of principle, but no more.
    • Home equity loan interest can be deducted as long as it meets the criteria for mortgage loan interest, and the proceeds of the loan were used to build, buy or renovate a primary or second home. If you used the money from your home equity loan to go on vacation or pay for college, you can’t deduct the interest.
  • Charitable Gifts:
    • You can deduct up to 60 percent of your AGI.
  • Casualty and Theft Losses:
    • Only losses from a federally declared disaster can be deducted.

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Once you complete your Schedule A, transfer the total amount of deductions to line 8 on Form 1040. If the amount of your total deductions is less than the standard deduction, take the standard deduction instead.

When Should Someone Itemize Deductions?

Most taxpayers should compare their standard and itemized federal tax deductions and take whichever one is higher. But some taxpayers aren’t allowed to use the standard deduction. Taxpayers who must itemize deductions include:

  • Nonresident aliens or dual-status aliens, unless married to a U.S. citizen or resident alien at the end of the tax year
  • Married taxpayers filing separately whose spouses itemize their deductions

Taxpayers who usually benefit from itemizing deductions include those who:

  • Don’t qualify for a standard deduction
  • Had medical expenses exceeding 7.5 percent of their adjusted gross income
  • Paid mortgage interest, points or property tax on a home
  • Incurred uninsured losses due to a federally declared disaster
  • Made large charitable contributions

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Tax Deductions 2017: 50 Tax Write-Offs You Don’t Know About

Consider your state tax return when deciding between taking the standard deduction and itemizing, because a significant benefit of one over the other on your state taxes might compensate for a negative effect of that choice on your federal return.

Some Deductions Have Been Eliminated

Miscellaneous deductions like work uniforms, union dues, work-related entertainment, tax preparation fees and investment expenses have been eliminated. Taxpayers who have claimed these deductions in the past might find they are better off taking the standard deduction now that these deductions have been eliminated.

Click to read an explanation on five common tax forms.

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Karen Doyle contributed to the reporting for this article. 

About the Author

Brian Nelson

Brian Nelson is a Denver-based writer who specializes in writing about finance, technology, and other complex topics. As a former Certified Financial Planner, Brian spent years helping people understand their finances and learned that not all successful financial planning is about numbers. Brian has written for numerous financial planning firms, personal finance websites and financial publications including Dow Jones Publications.

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