When filing your taxes each year, you may choose between taking the standard deduction and itemizing your deductions.
The standard deduction is a fixed amount you may deduct from your taxable income each year. This amount varies depending on your tax filing status and is updated yearly to account for inflation.
The standard deduction for 2021 taxes is $12,550 for individuals ($12,950 in 2020), $18,800 for heads of household ($19,400 in 2022), and $25,100 for married filing jointly taxpayers ($25,900 in 2022). The standard deductions were roughly doubled as a result of changes made by the Tax Cuts and Jobs Act (TCJA) for 2018.
- Itemized deductions help some taxpayers lower their annual income tax bill more than the standard deduction would provide.
- The surviving itemized deductions include several categories like medical expenses, mortgage interest, and charitable donations.
- Itemizing most often makes sense for higher-income earners who also have a number of large expenses to deduct.
Standard vs. Itemized Deductions
Prior to the implementation of the TCJA, millions of people could itemize their deductions and claim a bigger deduction on their tax returns. This may no longer be required as a result of the increased standard deductions.
Read on to understand when to itemize your deductions and when to take the standard deduction to get the most out of your tax return.
The number of taxpayers for whom itemizing will pay off is projected to fall dramatically between the 2018 and 2025 tax years, when the TCJA is in force, owing to the much larger standard deduction.
(There are two caveats: the personal exemption was eliminated by the TCJA, which may counteract this benefit for some.) On the other hand, the child tax credit has been increased and is now available to more families, which will shift some returns in the other way.)
The new legislation also abolished or modified a number of previously available deductions for taxpayers.
A change in the tax legislation substantially tripling the standard deduction between the 2018 and 2025 tax years has made itemizing tax deductions less favorable for many individuals.
The Purpose and Nature of Itemized Deductions
Itemized deductions vary from above-the-line deductions like self-employment expenditures and student loan interest. They are deductions from adjusted gross income that are made below the line (AGI).They are calculated on Schedule A of the Internal Revenue Service, and the total is transferred over to your 1040 form.
After itemized deductions are deducted from your income, the remaining amount is your taxable income. The government introduced itemized deductions as a social engineering tool to give economic incentives for taxpayers to do particular activities, such as purchase homes and donate to charity.
Which Deductions Can Be Itemized?
Schedule A is divided into multiple parts, one for each sort of itemized deduction.
The following is a summary of the scope and limitations of each itemized deduction category. To assist with future planning, we’ve highlighted major changes under the new tax legislation, which primarily took effect in tax year 2018.
Unreimbursed medical and dental expenses
This is perhaps the most difficult—and most painful—deduction to qualify for. Taxpayers who incur eligible out-of-pocket medical and/or dental costs that are not covered by insurance may deduct up to 7.5% of their AGI. This was supposed to increase to 10% beginning with the 2019 tax year (payable in April 2020).The 7.5% level, however, will stay in effect for the 2019 and 2020 tax years, according to an extension enacted into law on December 20, 2019.
Long-term care premiums
Premiums for long-term care are calculated significantly differently than medical expenditures. Premiums for long-term care insurance are tax-deductible if they exceed 10% of an individual’s AGI. There is an age-based deduction restriction, and the insurance must be “qualifying.”
Home mortgage and home-equity loan (or line of credit) interest
Mortgage interest is deductible on loans up to $750,000. Every year, mortgage lenders provide Form 1098 to borrowers, detailing the precise amount of deductible interest and points paid in the previous year.
Taxpayers who purchased or refinanced a property during the year may deduct the points they paid, subject to certain restrictions. If the mortgage was originated prior to December 16, 2017, a higher maximum of $1 million applies. If you refinance that previous mortgage, the higher maximum still applies as long as the loan amount remains the same. The $1 million threshold reapplies for tax years beginning after 2025, regardless of when the loan was taken out.
Home-equity loan or line of credit interest
The interest on a home equity loan or line of credit is deductible if the funds are used to purchase, construct, or significantly renovate the house that secures the loan.
Taxpayers that itemize may deduct two kinds of taxes on their Schedule A. Personal property taxes, including real estate taxes, are deductible, as are state and local taxes assessed in the preceding year.
However, if the taxpayer itemized deductions in the prior year, any state refund received by the taxpayer must be reported as income. Taxpayers may deduct just $10,000 of these combined taxes beginning in 2018 and ending in 2025. Furthermore, international real estate taxes that are unrelated to a trade or company are not tax deductible.
Also, if you paid your state or local income tax in advance for the next year, that amount is not deductible on your current-year taxes.
Within certain limits, every gift given to a recognized charity is tax deductible. The amount that may be deducted for monetary donations between 2018 and 2025 is restricted to no more than 60% of the taxpayer’s AGI. Excess amounts must be carried over to the next year. Other donations may be restricted to 50%, 30%, or 20% of your AGI, depending on the kind of property and organization receiving the gift.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted into law on March 27, 2020, establishes a new above-the-line charitable gift deduction of up to $300 and lowers restrictions on existing charity deductions in order to promote charitable giving during the COVID-19 pandemic. These include both monetary and food gifts, and they apply to both people and companies.
Casualty and theft losses
Schedule A may be used to record any tragedy or theft loss suffered as a consequence of a federally declared catastrophe. Unfortunately, after deducting $100 from the loss amount, only losses in excess of 10% of the taxpayer’s AGI are deductible. If a taxpayer incurs a casualty loss and deducts it on their taxes in one year, any compensation received in subsequent years must be included as income. Form 4864 must be completed by taxpayers, and the loss must be reported on Schedule A.
Unreimbursed job-related expenses and certain miscellaneous deductions
Prior to the TCJA, employees who incurred job-related costs may deduct amounts that exceeded 2% of their AGI. To claim job-related costs, you must now fall into one of four categories. You must be a reserve in the armed services, a qualified performing artist, a state or local government official working for a fee, or an employee with impairment-related work expenditures.
Workers who fall into one of these groups and want to claim costs must fill out Form 2106. Furthermore, qualifying instructors may deduct up to $250 in unreimbursed expenditures by completing Schedule 1.
Other Miscellaneous Deductions
This third category of itemized deductions covers gambling losses up to the amount of wins, losses from partnerships or subchapter S businesses, estate taxes on income in respect of a deceased (IRD), and certain miscellaneous costs. From 2018 through 2025, several of these deductions are abolished or altered. For further information, see IRS Publication 5307 Tax Reform Basics for Individuals and Families and consult with your tax expert.
Summary of Tax Law Changes
If you file as a single taxpayer for the 2021 tax year, or if you’re married and filing separately, you’ll probably be better off taking the standard deduction of $12,550 ($12,950 for 2022) if your itemized deductions are less than that amount.
The same is true for married couples filing jointly who have no more than $25,100 ($25,900 for 2022) in itemized deductions and heads of household who have no more than $18,800 ($19,400 for 2021) in deductions.
Following the adoption of the TCJA in 2018, these deductions almost doubled.
Tax deductions you can itemize
- Mortgage interest of $750,000 or less
- Mortgage interest of $1 million or less if incurred before Dec. 16, 2017
- Charitable contributions
- $250 (for educators buying classroom supplies) (for educators buying classroom supplies)
- Medical and dental expenses (over 7.5% of AGI)
- State and local income, sales, and personal property taxes up to $10,000
- Gambling losses
- Investment interest expenses
- $2,500 in student loan interest (these do not need to be reported on Schedule A but may be deducted from your taxable income beyond the line); income phaseout restrictions apply.
Deductions lost because of TCJA
- Interest on mortgage loans ranging from $750,000 to $1 million
- Exceeding $10,000 in state and local income, sales, and personal property taxes
- Natural calamity damages (unless in an area designated by the president)
- Unreimbursed employee expenses
- Alimony payments for divorce settlements entered into after December 31, 2018
- Expenses associated with relocation (except active-duty military)
- Tax-preparation expenses
Income Limitations for Itemized Deductions
Previously, taxpayers with AGIs over specific thresholds faced restrictions on the amount of itemized deductions they could claim. The TCJA suspends these constraints, known as the Pease limitations, from 2018 to 2025.
Remember to Aggregate
There are situations when the extra deduction from excess medical or work-related expenditures allows itemized deductions to surpass the standard deduction. As a result, you should not assume that you cannot deduct miscellaneous costs or that you cannot itemize deductions if your itemizable deductions are inadequate to qualify you.
The Bottom Line
Many itemized deduction regulations are outside the scope of this article. Working with an experienced and professional tax preparer may assist guarantee that those requirements are followed while preparing your tax return. Your tax professional should also be able to help you decide whether to itemize or accept the standard deduction. Take some time to go through what to anticipate from 2018 to 2025 based on the new tax law.
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