When preparing a federal tax return, you can choose between a standard deduction or several itemized deductions. In either case, a tax deduction is designed to reduce a taxpayer’s tax liability. This is primarily to reimburse losses, incentivize investment, and reduce the tax liability for low-income households.
Your standard deduction depends on your filing status, while your itemized deductions depend on which deductions you qualify for, with most of them having their qualification requirements. For example, if you owe $42,400 in taxes in 2022 and are single, your standard deduction would be $12,950 – meaning you would only owe $29,450 before tax credits.
If you are married filing jointly, you can double that deduction ($25,900), with the caveat that a joint tax return takes both your income and your spouse’s income into consideration. Whether the standard or itemized deductions are suitable for you depends entirely on how much you earn, your filing status, and whether you have any qualifying itemized deductions.
It’s important to mention that the standard deduction is much higher now than just a few years ago, following the Tax Cuts and Jobs Act of 2017. The TCJA doubled the standard deduction for 2018 through 2025 while eliminating several itemized deductions. This change will last until 2025, at which point Congress might make the change permanent or introduce a new tax act. For 2022, the standard deduction for taxpayers under age 65 is:
- Single or married filing separately: $12,950
- Head of household: $19,400
- Married filing jointly/surviving spouse: $25,900
Being older than 65 or blind qualifies you for an additional standard deduction amount. In 2022, that additional standard deduction is $1,400 for each qualifying circumstance. That meant it was wiser to claim the standard deduction instead of itemizing your deductions for many Americans.
However, that doesn’t mean it’s no longer worth itemizing your deductions. If you’re willing to do the math or pay for a professional tax preparation service, you can determine whether itemized deductions make sense, given your current expenses this year. Even the IRS encourages this. Pick the deduction method that nets you the lowest tax liability. Itemized deductions are usually available for costs such as:
- State and local taxes (up to $10,000).
- Mortgage interest (on the first $750,000 of a mortgage’s debt).
- Charitable contributions.
- Unreimbursed medical expenses.
- Unreimbursed employee business expenses.
- Personal and real property taxes.
- Casualty losses.
- Theft losses.
- And more.
Having any given one of these expenses or losses does not qualify you for an itemized deduction on them. Nearly every itemized deduction must be an expense worth at least 2 percent of your adjusted gross income, if not more. For example, for an itemized deduction on unreimbursed healthcare costs, the total cost must exceed 7.5 percent of your adjusted gross income (AGI).
Charitable contributions can only be tax deductible up to a limit of 60 percent of your AGI. The list goes on. There are rare exceptions. For example, gambling losses are deductible regardless of your AGI. However, they are limited to an equal amount of reported gambling winnings (i.e., if you lost $8,000 gambling but won and reported $2,400 as income, you can only deduct $2,400 of your gambling losses).
While you can significantly reduce your taxes via itemized deductions, a certain income level will invoke the alternative minimum tax (AMT). In 2022, married couples filing jointly with an AGI of more than $118,100 ($75,900 for single filers or married filers filing separately) may qualify for the alternative minimum tax calculation. Finally, your itemized deductions used to be reduced if you earned a certain income level.
However, the TCJA eliminated this reduction until 2025. To help counter this loss, the TCJA expanded and increased the child tax credit and other dependent credits. The TCJA also eliminated individual exemptions, which were used to support larger families further offset their tax costs by claiming a dollar amount exemption on each dependent.
Should You Itemize Your Deductions?
The question of whether to claim a Schedule A tax form and begin filling each of your itemized deductions is one of pure math. Please consider all applicable tax-deductible costs (as mentioned above) over the last year and determine whether they exceed the standard deduction.
A professional tax preparation service or software can help you decide whether or not it is best to itemize or choose the standard deduction for this tax year. There are circumstances under which you must itemize. For example, if you are married and filing separately, and your spouse is itemizing, you must also itemize.
Itemized Deductions on Your Tax Return
If you are planning to itemize your deductions on your tax return, you will need Schedule A in addition to your Form 1040. You may also need Form 13614-C. For more information, you can refer to Publication 17. Linked is the version for 2021 – the IRS publishes a new one for each tax filing year.
You Can Change Your Mind
It’s important to note that deciding to itemize today doesn’t mean you have to itemize next year. You are encouraged to determine whether itemizing is better for your tax return each year. And while the TCJA’s adjustment to standard deductions has simplified that question for many Americans, if your circumstances change severely from one year to the next, it is worth checking if you are better off itemizing your deductions rather than picking the standard deduction this tax year.
What If You Made a Mistake?
If you picked an itemized deduction that you did not qualify for (such as an unreimbursed medical cost that did not exceed the prerequisite percentage of your AGI), the IRS would adjust your tax return based on this discrepancy and bill you for the additional tax owed. If you have any tax credit or refund still owed to you, the IRS may take the amount owed out of that refund. Otherwise, you will be sent a balance due and requested to pay the amount in full.
The IRS can and does penalize failure to pay back taxes, even on simple mistakes. Keep an eye out for letters or correspondence from the IRS warning you about a due balance and potential penalties. Tax preparation services can help take the mystery out of filing your tax returns and help you ensure that you aren’t missing out on crucial savings. Talk to a tax professional today to determine how you should handle your tax deductions.