Itemizing deductions can be a good strategy to reduce your tax bill — but only if your itemized deductions add up to a bigger number than your standard deduction. Most taxpayers end up being better off taking the standard deduction, and about 90% of tax returns do this, according to IRS data.
The standard deduction has more than doubled since the passage of the Tax Cuts and Jobs Act in 2017. One good thing about the larger standard deduction is that it has helped make it simpler for many Americans to file taxes. But if you have enough deductions to itemize, this can help you reduce your taxable income even more.
Let’s look at a few of the biggest mistakes in itemizing deductions, and how you can get the tax breaks you deserve.
1. Trying to itemize the wrong deductions
Many people don’t understand which deductions can be itemized. Only a few categories of expenses can count as itemized deductions:
- State and local income taxes: (aka “SALT”)
- Real estate taxes: (property taxes that homeowners pay)
- State and local sales taxes: You can deduct your state and local income taxes, or your state and local sales taxes, but not both. If you have made multiple big purchases during the tax year, such as buying a new vehicle and a new boat, or buying lots of materials to renovate a home, it might be worth deducting your sales taxes instead of income taxes.
- Personal property taxes: This can include vehicle registration fees.
- Mortgage interest: This can include interest on home equity loans that are used for home improvement.
- Disaster losses: You can deduct personal casualty and theft losses that are attributable to a federally declared disaster. The disaster losses must be more than 10% of your adjusted gross income.
- Gifts to charities: This is where you can get tax deductions for charitable donations. You must donate to qualified nonprofit organizations and keep records or receipts of your cash and non-cash gifts, according to IRS rules.
- Some medical and dental expenses: You can only deduct the portion of healthcare expenses that is more than 7.5% of your adjusted gross income.
To see full details on which deductions can be itemized, check out the IRS Instructions for Schedule A.
2. Forgetting about the $10,000 SALT deduction cap
One of the biggest misunderstandings about itemized deductions since 2018 (the first tax year that the Tax Cuts and Jobs Act took effect) is the SALT deduction cap. Under these relatively new IRS rules, people can only deduct up to $10,000 per household of state and local taxes. And that $10,000 deduction limit applies to state and local income tax or sales tax, but not both.
This means that if you’re a new homeowner in a higher-tax state like California or New York, you might be paying a lot of money for property taxes for the first time. But don’t count on being able to deduct property taxes from your federal taxable income.
For example, let’s say there is a married couple (filing jointly) in New York who bought their first home in January 2023. They’ve paid $500 per month on property taxes, plus $500 per month in state income taxes, for a total of $12,000 in 2023. But because of the SALT deduction cap, this couple, as a household, can only deduct $10,000 of that $12,000 — and only if their other itemizable deductions add up to be more than the standard deduction of $27,700.
The SALT deduction cap can make it harder to itemize. It can be painful to pay all those state and local taxes, knowing it won’t make a difference on your federal tax return. But if your total itemized deductions fall short of the standard deduction, you should take the standard deduction instead.
3. Claiming the wrong amount of medical expenses
Another common misconception about itemized deductions is the idea that “you can deduct your medical expenses.” The truth is that you can only deduct medical expenses and dental expenses that are greater than 7.5% of your adjusted gross income.
For example: if you have an AGI of $50,000, then 7.5% of that amount is $3,750. Let’s say you had a major surgery in 2023, and your out-of-pocket costs were $5,000. Does this mean you can deduct $5,000 of medical expenses?
No. It means you can deduct $5,000 minus $3,750, for a total of $1,250.
The larger your income, the harder it becomes to deduct medical expenses. For example, a household with an AGI of $100,000 would need to have more than $7,500 of medical expenses to be able to deduct them.
Bottom line: To avoid these mistakes (and others) in itemizing deductions, consider using tax prep software. You don’t have to go it alone when doing your taxes. The best tax prep software companies give you a few options depending on the complexity of your tax return, including access to professional tax advisors.
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