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 income and the amount of tax you owe. Keep reading to learn about the two main types of deductions and how they can help you reduce your tax bill.

Standard Deduction vs. Itemized Deductions

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.

Learn: Best and Worst Ways to Itemize Deductions

What Is the Standard Deduction Amount?

The amount of the standard deduction changes each year based upon inflation, and it’s calculated and published by the IRS. For tax year 2017, the standard deduction for married couples filing jointly is $12,700. It will be $300 higher for tax year 2018.

For single taxpayers and married taxpayers filing separately, the standard deduction is $6,350 for 2017. This will increase to $6,500 in 2018.

Taxpayers who are 65 or older on the last day of the tax year get a higher standard deduction, as do individuals who meet the IRS definition for blindness on the last day of the year. These increases are also calculated for a spouse who is blind or over 65.

Your standard deduction amount also depends on whether someone else can claim you as a dependent on his tax return.

How Do You Itemize Deductions?

Itemizing tax deductions requires filing a Schedule A along with Form 1040. Schedule A serves as an itemized deductions worksheet. Taxpayers complete the form and any sub-forms to calculate the total deduction amount.

For example, the Schedule A has a section where you can itemize your mortgage interest and points. You complete the Schedule A by entering information from Form 1098, the Mortgage Interest Statement your mortgage lender uses to report how much you paid in interest, points and mortgage insurance premiums. The lender sends you a copy of Form 1098 and it also reports the information to the IRS.

After you complete Schedule A and calculate your total deduction, you transfer the deduction amount to Line 40 of Form 1040, where you subtract it from your income.

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 10 percent of their adjusted gross income
  • Paid mortgage interest, points or property tax on a home
  • Incurred uninsured losses due to casualty or theft
  • Made large charitable contributions
  • Had lottery winnings and losses
  • Paid interest on money they borrowed to invest

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

The IRS limits itemized deductions for individuals with AGIs exceeding:

  • $154,950 for married taxpayers filing separately
  • $258,250 for single taxpayers
  • $284,050 for heads of household
  • $309,900 for qualifying widow(er)s and married couples filing jointly

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 more than make up for a negative effect of that choice on your federal return.

Keep Reading: How to File Taxes Early — and Get Your Return Faster