Schedule A on IRS form 1040 sets forth your personal, itemized deductions. The main four itemized deductions are medical and dental expenses, state and local taxes (SALT), home mortgage interest, and charitable contributions. In arriving at taxable income, taxpayers may choose to itemize their deductions. Or a standard deduction is available if you do not itemize.
It can be tedious to keep records on itemized deductions, and I am often asked by clients if it is worth the effort. After all, in 2024, the standard deduction is $14,600 for each individual filer, $29,200 if married filing jointly, with additional deductions for those that qualify as head of household, the blind, and seniors. But before we get to this question, we need to review recent history.
Prior to 2018, roughly 30% of taxpayers itemized. In 2018, the Tax Cuts and Jobs Act nearly doubled the standard deduction. After this change in the tax code, the percentage of itemizers dropped to around 10%.
Besides the increase in the standard deduction, a few other rules inhibit the use of itemized deductions:
• Medical and dental expenses. You can only deduct the portion of your unreimbursed medical and dental expenses that exceed 7.5% of your adjusted gross income.
• State and local taxes (SALT). SALT taxes are capped at $10,000 ($5,000 if married filing separately). This includes either state and local income taxes or state and local sales taxes (but not both), plus real estate and personal property taxes.
• Home mortgage interest. Interest paid on mortgages for a primary and secondary home is only deductible up to certain debt limits: (a) Up to $750,000 for loans taken after December 15, 2017; or (b) up to $1 million for loans taken before that date. In addition, interest on home equity loans is deductible only when used to buy, build, or improve the home.
• Charity. Contributions are deductible only if made to qualified charitable organizations, which would not include certain nonprofit civic leagues, sports clubs, labor unions, lobbyist organizations, homeowners' associations, and political candidates. Also, contributions are deductible up to a percentage of your adjusted gross income, usually 60% for cash contributions.
(Note, there are other itemized deductions but these are not as commonly applicable, e.g., casualty and theft losses, gambling losses up to the amount of winnings, investment interest, and impairment-related work expenses.)
Back to the original question, should I keep track of my itemized deductions?
Here are five tips to consider:
1. Start by reviewing your mortgage interest, which is reported by the lender in January on Form 1098. The number one reason my clients itemize these days is because they are paying a decent chunk of interest on their mortgage each month. The way amortization schedules work, more interest will be paid earlier in the mortgage. Also, the higher your interest rate, the more interest you will pay. Typically, I can learn quickly whether it makes sense to itemize simply by reviewing the Form 1098(s).
2. If you escrow your property taxes, the property taxes paid should also be reported on Form 1098. If not available on Form 1098, most county auditors keep a record of the property taxes paid on their public website.
3. Remember, SALT taxes are capped at $10,000. For this reason, mortgage interest tends to play more of a factor in deciding whether you should itemize.
4. If you have health insurance, it can be a challenge to get over the 7.5% adjusted gross income threshold. Also, medical payments made through an HSA plan do not count towards your itemized deductions.
Seniors are a unique category worth mentioning here. They can have a lower adjusted gross income (due to retirement) and higher medical bills. However, Medicare is good insurance and most take part. Also, seniors receive a higher standard deduction when they reach age 65, and they tend to pay lower mortgage interest (they are further down the road on the amortization schedule or have no mortgage). For this reason, most seniors I work with do not itemize. One primary exception is the very unfortunate situation where nursing home care is needed.
5. Finally, qualified charitable organizations typically mail an acknowledgement of receipt for donations; however, if your giving is substantial, I recommend keeping independent verification. If you donate more than $500 in non-cash items, you need to itemize each donation on Form 8283.
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