There’s good reason 90% of taxpayers claim the standard deduction: It more than covers what most Americans can deduct on their own. However, in certain years, some taxpayers may want or need to itemize instead.
The standard deduction for 2024 is $14,600 ($29,200 for married couples) and a bit more if you’re 65 or older. The decision to itemize deductions usually comes down to whether the total amount of your allowable itemized deductions is greater than this standard deduction. This often means that your mortgage interest, property taxes, disaster losses, medical bills, or other deductible expenses were excessive in that tax year. Let’s take a look at these and other reasons to itemize deductions in any given year:
- You’re prohibited from taking the standard deduction. According to the IRS, some taxpayers must itemize. They include:
- Married individuals filing as ‘married filing separately’ whose spouses itemize deductions.
- Individuals who file a tax return for a period of less than 12 months because of a change in their annual accounting period.
- Nonresident aliens or dual-status aliens for at least part of the year. However, there are exceptions, per Publication 519, U.S. Tax Guide for Aliens.
- Those filing as an estate or trust, common trust fund, or partnership.
- Someone claiming you as a dependent takes the standard deduction. You may still be able to claim deductions on your own, but your standard deduction will be greatly limited.
- Casualties, disasters, and thefts. Texans have suffered several different natural disasters in the past few years. A net qualified disaster loss due to a federally declared disaster could increase your standard deduction amount. For these and other property losses, however, it’s essential to determine whether the loss is deductible. It’s trickier said than done. Then, you can decide if the deduction exceeds the standard.
- High home mortgage interest. You can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately). If the debt predates December 16, 2017, the limitation is up to $1 million (or $500,000). However, note that the itemized deduction for mortgage insurance premiums has expired.
- To deduct charitable contributions, you must itemize. You must also follow several important rules, including donating to a qualified charity and receiving the correct acknowledgment from the organization. There are great ways to get the most tax advantage out of your donations by itemizing in one year. This includes “bunching” a few years together into one (most beneficial when facing significant capital gains). You could consider adding that money to a donor-advised fund (DAF), allowing you to grow the money tax-free until you’re ready to distribute it to causes.
- State and local taxes (SALT). The most significant part of the SALT tax for most people is their property tax obligation. This deductible tax category alone won’t push you over the standard deduction threshold because it’s capped at $10,000 at least through 2025. However, it can significantly contribute to a bottom-line opportunity to itemize.
- Out-of-pocket medical expenses. If your out-of-pocket medical expenses exceed 7.5% of your adjusted gross income (AGI), you may have a case for utilizing them to itemize your way to a more significant deduction. Of course, if you had a major medical event, it’s worth crunching the numbers for that tax year. However, the IRS is surprisingly generous with what it allows to be deducted. So, if you or any of your dependents regularly pay for even alternative preventative treatments, you may want to dig deeper. This includes chiropractors, dental work, acupuncture, weight-loss treatments tied to an approved diagnosis (including obesity), and more.
This is certainly not an all-inclusive list. That’s why we need to assert that a very poor reason to take the standard deduction is because it’s just easier. It is, of course, but you may be giving more to the IRS than is necessary. Bring any significant or repeating expenses, losses, or donations to the table as you consult with your tax advisor yearly. Let them advise you on the pros and cons of taking the easy route through tax season. Feel free to contact us with questions.