What are itemized deductions and how do they work?

According to the IRS, 87% of American taxpayers claim the standard deduction when filing their taxes, because it’s easy, there’s less paperwork to keep track of, and under President Trump’s Tax Cuts and Jobs Act of 2017, the standard deduction is worth twice as much as before.

But if you’re a high-income earner, own a house with a mortgage, have large, unreimbursed medical expenses, or experienced a natural disaster this tax year, there are a few reasons why itemizing deductions might actually save you from paying more in taxes — so it’s worth keeping track of your eligible expenses to see if you could benefit.

What are itemized deductions?

Itemized deductions are expenses that taxpayers can claim on their federal tax returns that reduce their amount of taxable income. Some taxpayers have many eligible expenses that can be itemized and “written off,” thus generating more tax savings than claiming the standard deduction.

These expenses include large out-of-pocket medical expenses, like for prescription drugs or hospital stays; charitable donations; certain state and local taxes, such as sales taxes and property taxes; mortgage discount points and interest; and some investment interest. The IRS imposes specific rules to follow in order to be eligible to itemize deductions, which could add some time and complexity to filing your taxes.

Related: Tax Tip: Has your federal tax bracket changed?

In addition, under the Tax Cuts and Jobs Act of 2017, which President Trump called “the biggest tax cuts and reform in the history of our country,” the U.S. tax system was effectively overhauled in an effort to make filing easier for taxpayers. The Act lowered the corporate tax rate to 21% and eliminated the $4,050 personal exemption you could previously claim for yourself and each of your dependents, while at the same time nearly doubling the standard deduction and limiting certain itemized deductions. For instance, you can no longer itemize moving expenses, alimony payments, or foreign taxes paid on real estate.

Who is eligible to itemize their deductions?

The IRS states that “individuals not in a trade or a business or an activity for profit” may itemize their deductions. (The 1987 Supreme Court case Commissioner v. Groetzinger unpacked that to mean that if you earn money with regularity and continuity, that income is subject to taxation. Anything else is a hobby.)

In addition, there are some taxpayers who are not allowed to claim the standard deduction; therefore, they must itemize their deductions. They include:

• A person whose filing status is “married filing separately” and has a spouse who is itemizing their deductions
• Someone who is being claimed as a dependent by someone else
• A person who filed a tax return twice in less than a year
• Nonresident aliens or dual-status aliens
• Those who are filing as an estate or trust

In order to itemize deductions, you must have proof or substantiation that your expenses occurred during the tax year, and that they were deductible. This includes receipts and, in the case of property tax deductions, documents that show the amount paid and that the tax was based on the property’s value.

Examples of itemized deductions

A few of the most common itemized deductions include:

• Medical expenses that do not exceed 7.5% of your adjusted gross income, including out-of-pocket medical expenses, certain premiums for long-term care insurance, prescription drug payments, including insulin, alternative medical treatments, like acupuncture, and home improvements advised by a physician, such as widening doorways or building ramps for wheelchair access.
• Property taxes, which is known as the SALT deduction: This allows homeowners to deduct up to $10,000 in property taxes and either state income tax or state and local sales taxes.
• Mortgage interest deductions, which lets homeowners who pay interest towards their mortgage reduce their taxable income on a primary residence or second home—up to $750,000.
• Interest paid on money used to buy taxable investments, such as margin loans.
• Contributions to IRS-recognized charities, which is limited to 30–60% of your adjusted gross income.
• Losses due to natural disasters, like earthquakes, hurricanes or fires, that do not exceed 10% of your adjusted gross income.
• Gambling losses, which are calculated by subtracting your losses from your winnings and reporting the difference (contrary to popular belief, deducting gambling losses is not available to taxpayers who claim the standard deduction).

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When should you itemize deductions?

It makes sense to go the itemized deduction route if your itemized deductions add up to more than the standard deduction. The IRS says that if the amounts don’t differ by much, it prefers that you claim the standard deduction to reduce the possibility of receiving an audit.

Here are the standard deductions, categorized by tax filing status, for tax years 2023 and 2024. Compare these figures with your itemized deductions: If the standard deduction amount is greater, then that’s what you should claim on your federal tax return.

2023 & 2024 standard deductions by filing status

How do you itemize deductions?

So, you’ve calculated your eligible expenses. You’ve decided that itemized deductions make the most sense. Now it’s time to file your federal income taxes.

Choosing to itemize over claiming the standard deduction is a critical first step — because the IRS won’t let you claim both.

Another roadblock that may pop up has to do with the forms you use to file your tax returns: You can only itemize deductions using the longer forms, Form 1040 and schedule A, so save some time in your schedule to complete them.

And remember that the expenses you are deducting must occur in the tax year you are filing.

Itemized deductions vs standardized deductions

Related: 2024 tax brackets: What you need to know for next year's tax season