When to Itemize: Maximizing Your Deductions
Itemizing your deductions can require more time and effort, but the financial reward can make it worthwhile if your eligible deductible expenses exceed the standard deduction. Choosing whether to itemize is one of the key decisions when preparing your taxes, and understanding when it makes sense can lead to significant tax savings.
For 2024, the standard deduction is set at $13,850 for single filers and $27,700 for married couples filing jointly. While these amounts offer a simple and straightforward reduction to your taxable income, they may not always result in the greatest savings, especially if you have major deductible expenses. That’s where itemizing comes in.
When Should You Consider Itemizing?
Itemizing deductions is most beneficial when your deductible expenses, such as mortgage interest, medical expenses, charitable donations, and state and local taxes, exceed the standard deduction. These specific deductions allow you to reduce your taxable income by the actual amount of each expense, giving you a more customized reduction.
Here are some scenarios where itemizing could make sense:
Homeownership: If you own a home and are paying mortgage interest, you may be able to deduct a substantial portion of that expense. For many homeowners, especially those with significant interest payments, itemizing could yield more savings than the standard deduction.
Significant Medical Expenses: If you’ve had a year with large medical bills, you may be able to deduct qualified medical expenses that exceed 7.5% of your adjusted gross income (AGI). This can be particularly valuable if you’ve faced high out-of-pocket costs due to surgery, long-term care, or ongoing treatments.
Charitable Contributions: If you regularly donate to charities, your contributions can also count toward an itemized deduction. Whether you’ve donated cash, goods, or other assets like stocks, itemizing can help you deduct these gifts, provided you’ve given to a qualified charity and kept accurate records of your donations.
State and Local Taxes: You can also deduct up to $10,000 of your combined state and local income, sales, and property taxes. If you live in an area with high property taxes, itemizing might allow you to deduct more than the standard deduction amount.
Life Events and Itemizing
Itemizing might not be something you do every year. Many taxpayers choose to take the standard deduction in years when their expenses are low. However, significant life events can change that decision:
Buying a Home: The first year of homeownership can bring substantial interest payments and closing costs that make itemizing attractive.
Major Medical Expenses: Unexpected health issues or surgeries can push medical expenses well above the threshold for deduction.
Charitable Giving: If you’ve made substantial donations or have a strategy of donating appreciated assets, the tax benefits could encourage you to itemize.
While itemizing can offer these benefits, it does require careful documentation. For each expense you plan to deduct, you'll need to provide receipts, statements, or other records to support your claim. This may seem like more work compared to the simplicity of the standard deduction, but the payoff could be well worth it in reduced taxes.
Get Professional Help
The decision to itemize is not always straightforward, especially when you’re balancing multiple factors such as state taxes, charitable giving, and medical bills. Consulting with a tax professional can help you navigate the rules and determine whether itemizing makes sense for your unique situation.
As you prepare for the 2024 tax season, talk to a tax advisor to see if itemizing your deductions can help you keep more of your hard-earned money.
