When you file your taxes, the IRS gives you two options for taking tax deductions. You can either take a standard or itemized deduction, but not both. A standard deduction is a set amount that’s determined by the IRS each year. If you choose the standard deduction, your deduction is predetermined and you can check your amounts for 2022 and 2023 here.
Itemized deductions are specific expenses that are eligible to be deducted by the IRS. If you choose itemized deductions, the amount will vary by individual since everyone has different expenses incurred throughout the year. If you have a lot of eligible expenses, your itemized deductions could be greater than the standard deduction amount.
FEATURED COURSE
Lorilyn Wilson teaches Taxes & Accounting Foundations For Business Owners
Lorilyn Wilson, CPA, teaches you how to properly set-up your business (from choosing the right business entity to creating a financial forecast) and the must-dos ALL business owners need to understand when it comes to preparing your taxes (including expenses, write-offs, and how-to lower your risk of being audited).
Why do itemized deductions exist?
Why does the IRS give you two different options rather than making everyone take the standard deduction? The IRS introduced itemized deductions as a way to offer incentives for taxpayers to buy homes and make donations to charities. Mortgage interest and property taxes are all deductible, and they can account for a major part of your total deductions each year.
Also read: Common Tax Deductions & Credits
What deductions can be itemized?
- State and local income, sales, and property taxes: This includes taxes paid to state and local governments, such as income taxes, sales taxes, and property taxes.
- Mortgage interest: Interest paid on a mortgage for a primary or secondary residence may be deductible.
- Charitable donations: Donations made to qualified charitable organizations may be deductible.
- Medical expenses: Medical expenses that exceed a certain percentage of your adjusted gross income (AGI) may be deductible.
- Job expenses and miscellaneous deductions: Certain job expenses and miscellaneous expenses such as tax preparation fees, investment expenses, and safe deposit box rental fees may be deductible if they exceed a certain percentage of your AGI.
- Casualty and theft losses: If your property has been damaged or stolen, you may be able to deduct losses that are not covered by insurance.
- Certain education expenses: Some educational expenses, such as tuition, may be deductible.
How to itemize your deductions
If you want to claim itemized tax deductions, file your income taxes using Form 1040 and list all your itemized deductions on Schedule A. You’ll have to have
You should speak with your accountant to determine what expenses are eligible to be itemized before reporting them to the IRS, but here’s what the steps might look like:
First, enter all your eligible expenses into Schedule A. Next, add up all your expenses. This is the total of your itemized deduction amount. The next step is to copy over the amount into the second page of Form 1040 and subtract it from your final taxable income number. However, before doing so, you should double check to make sure that the total itemized deductions are greater than the standard deduction amounts set by the IRS, which you can check here.
If your itemized deductions total is greater than the standard deduction amount, then you should move forward with taking your itemized tax deductions. However, if the standard tax deductions are greater, then it wouldn’t make sense to take the itemized deduction.
Should you itemize your deductions?
Itemized deductions take more time to prepare, and require more administrative maintenance. With standard deductions, there’s nothing to calculate on your own. You simply take the amount set by the IRS and deduct it from your taxable income. You don’t need to keep any receipts or documents of your expenses. With itemized deductions, you’re required to calculate the eligible amount on your own, and keep records of each expense in case the IRS asks for proof.