Should I Itemize or Take the Standard Deduction?

It’s one of the most common questions for individuals preparing to file their income tax: take the standard deduction or itemize? Up until a few years ago, the answer was clearer for most people. Those with a lot of deductible expenses like mortgage interest or state and local taxes (SALT) often found it worthwhile to itemize. But since the Tax Cuts and Jobs Act (TCJA) under the last administration, the question has gotten more challenging for many.

The TCJA capped some deductions; for instance, the deduction for SALT is now limited to $10,000. The new law eliminated other deductions altogether. Alimony payments used to be deductible from income to the person making them (and taxable as income to the recipient), but alimony payments can no longer be deducted by the payer.

While the limitations on many tax deductions sound like bad news, the TCJA came bearing good news as well. One significant piece of good news was the increase in the standard deduction.

What is the Standard Deduction?

Put simply, the standard deduction reduces the amount of income on which you have to pay income tax. You don’t have to do or prove anything to get it. For single taxpayers and married taxpayers filing separately in 2021, the standard deduction is $12,550.

For couples filing jointly, it’s $25,550, and for heads of household, the standard deduction is $18,800. (If you are over 65 or blind, $1,300 is added to your standard deduction. If you are also unmarried (but not a surviving spouse), that amount goes up to $1,700. However, if someone can claim you as a dependent, you get a smaller standard deduction.)

So, if you are single and earn $100,000 per year, you could deduct $12,550 from that amount when calculating your taxes. Your taxable income would be $87,450. The TCJA nearly doubled the standard deduction. As a result, many people for whom it made sense to itemize deductions before found that they could pay the same or less in taxes by taking the new, higher, standard deduction — and with a lot less work. All you have to do is check a box.

What Does it Mean to Itemize Deductions?

On the other hand, if you have enough deductible expenses, it may be worth it to itemize them on your income tax return. Itemizing deductions means you need to keep receipts and records of deductible expenses including mortgage interest, property tax, state income tax, charitable deductions, mileage, and certain business and medical expenses. Quite frankly, itemizing is a lot more work, and if you are audited by the IRS, you may have to produce documentation of the deductions you claimed. The IRS can audit tax returns going as far back as six years (though more commonly, audits take place within three years), so you might need to hang onto your records for a while.

Going to the trouble of itemizing can pay off, though, depending on your circumstances. Using the income and filing status scenario above, let’s say you paid $5,000 in mortgage interest in 2021, made $7,000 in charitable deductions, and paid $8,000 in property tax and other SALT. That’s a total of $20,000 in deductions — significantly more than your $12,550 standard deduction.

If you itemize your deductions, your taxable income would drop to $80,000. Not only would itemizing reduce the amount of income on which you paid tax, but it would drop you into a lower tax bracket in this case: 22% rather than 24%. In this situation, itemizing is probably a smart move.

Choosing Between Itemizing and Taking the Standard Deduction

If a quick analysis like the one above reveals that you have a lot of potential deductions, you may conclude that itemizing makes more sense. However, many people are eligible to take a variety of deductions. Any one of them might not be significant, but added together, they could make itemizing worthwhile.

If it’s a close call, you’ll need to decide whether saving a little bit of money would be worth the extra time and record-keeping needed to itemize. It could be a smart move to consult with a tax professional who may be able to help you identify all possible deductions for which you are eligible. There may be some you hadn’t considered, especially if your financial situation has recently changed. Things like a home purchase, becoming self-employed, or significant medical expenses during the year might make it worth your while to itemize deductions on your income tax.

The Bottom Line

Is it better to itemize or take the standard deduction? The answer could vary from year to year. Don’t wait until April to figure it out — run your questions by your tax professional as soon as possible.

If you are not sure whether to itemize your tax deductions, we invite you to schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group.