Ankurita Lala, an IRS Enrolled Agent with 5 years of expat tax experience, specializes in US tax preparation, Form 5471, GILTI tax, 8621 and 3520/3520-A for US citizens and Green Card holders living and working abroad.
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How to decide between the Standard Deduction and Itemized Deductions?
Choosing between the Standard Deduction and Itemized Deductions depends on which option reduces your taxable income the most.
Generally, if your eligible expenses add up to more than the Standard Deduction, itemizing might be the better choice.
What exactly is the Standard Deduction?
The Standard Deduction is a set amount that most taxpayers can deduct from their income without the need to list individual expenses.
For the 2024 tax year, this deduction is US$14,600 for single filers and US$29,200 for married couples filing jointly. It’s an easy way to reduce taxable income since you don’t need receipts or records, and it applies regardless of your actual expenses for the year.
What is itemizing?
Itemizing means listing specific expenses you paid during the tax year that qualify as deductions on your tax return. These expenses must be recorded in detail and generally apply to categories such as mortgage interest, state and local taxes, medical bills, and charitable donations.
When you itemize, you use Schedule A to list all qualifying deductions. If your total itemizable expenses exceed the Standard Deduction, itemizing may help lower your tax bill. However, this option requires more time, record-keeping, and receipts.
For those with significant expenses in certain areas, itemizing is often worth the extra effort. Below are some common deductible expenses that may make itemizing the better option:
- Mortgage Interest: You can deduct interest paid on your mortgage for a primary or secondary home, which often amounts to significant savings for homeowners with new or large mortgages.
- Property Taxes: You can deduct state and local property taxes up to a combined cap of US$10,000. This cap also includes other local taxes such as state income taxes, so total deductions here can add up quickly.
- Charitable Contributions: If you’ve made donations to qualified charities, you can deduct them, provided you keep receipts for contributions of US$250 or more.
- Medical and Dental Expenses: If you’ve had high out-of-pocket medical or dental expenses that exceed 7.5% of your adjusted gross income (AGI), these can be deducted. Common examples include doctor visits, surgeries, prescriptions, and medically necessary treatments.
- State and Local Taxes (SALT): You can deduct either state income tax or state sales tax, but not both. Generally, the higher of the two will provide the greatest benefit.
- Casualty and Theft Losses: If you suffered property losses from federally declared disasters, you may be able to deduct expenses related to casualty or theft.
- Investment Interest: If you’ve taken out loans to invest in taxable income-producing assets, the interest on these loans may also qualify for deduction.
Which taxpayers likely benefit from itemizing?
While fewer taxpayers itemize since the Standard Deduction increased under the Tax Cuts and Jobs Act (TCJA), certain groups still benefit from itemizing deductions:
- Homeowners: For those with a mortgage, especially in the early years of repayment when interest is highest, itemizing can result in a larger deduction than the Standard Deduction.
- Higher-Income Taxpayers: Those with significant state and local tax obligations may find that their total deductions are high enough to warrant itemizing, even with the US$10,000 SALT limit.
- People with High Medical Bills: Taxpayers who have incurred substantial medical expenses may qualify for deductions that make itemizing a better option. Remember, only medical costs above 7.5% of AGI can be deducted.
- Charitable Donors: If you’ve made substantial donations, itemizing can help you maximize the benefit of these contributions.
Quick Comparison of Itemizing vs. Standard Deduction
Deduction Type | Standard Deduction | Itemized Deductions |
Ease of Use | Simple, no record-keeping required | Requires receipts, itemized records, and Schedule A |
Who It Benefits | Most taxpayers | Taxpayers with significant deductible expenses |
Types of Expenses | Fixed amount | Mortgage interest, SALT, medical, charitable donations |
Savings Potential | May not capture all deductible expenses | Can be higher if expenses exceed the standard deduction |
Can you switch Between the Standard Deduction and Itemized Deductions?
Yes, you can choose each year between the standard deduction or itemizing, based on which option lowers your tax bill more. There’s no restriction on switching methods each year, so feel free to reassess annually.
Are medical expenses deductible If you use the Standard Deduction?
No, medical expenses are only deductible if you itemize.
Only the portion of your medical costs above 7.5% of your adjusted gross income (AGI) is deductible, so itemizing is only beneficial if these and other deductions exceed the standard deduction.
What if your Itemized Deductions don’t exceed the Standard Deduction?
If your itemized deductions add up to less than the standard deduction, taking the standard deduction will yield a bigger tax break. The IRS allows you to use whichever deduction provides the greater reduction, so itemizing is only necessary when those expenses are higher.
What do you need to keep to itemize?
If you itemize, retain receipts and records for medical bills, mortgage interest, donations, and other allowable expenses as proof for the IRS.
Keep these records for at least three years after filing, in case verification is required.
Can I use the Standard Deduction with mortgage interest?
Yes, you can use the standard deduction even if you have mortgage interest. However, if your mortgage interest plus other deductible expenses are greater than the standard deduction amount, itemizing could save you more on taxes.
