In the past, the difference between itemizing deductions on your tax return and claiming the standard deduction usually came down to whether or not you owned a home.
Homeowners typically paid enough mortgage interest and property taxes to make itemizing returns worth it, which allowed them to get a tax break for things like donations to charity and medical expenses.
But thanks to the Tax Cuts and Jobs Act of 2017 (TCJA), you’re better off claiming the standard deduction.
If you are using software like TurboTax it can help you figure out the best options but if not do you know if you will you be able to itemize deductions this year? Read on to find out.
Itemized deductions vs. standard deduction
When you file a tax return, you have a choice between adding up all of your available itemized deductions and claiming them on Schedule A or taking the standard deduction.
The standard deduction is an amount predetermined by the IRS and based on your filing status. If your total itemized deductions are higher than the standard deduction available for your filing status, you’ll usually choose to itemize.
On 2017 tax returns (the last year before the TCJA took effect), the standard deduction was roughly half what it is today. Single filers could claim a standard deduction of $6,350 and a married couple filing jointly had a standard deduction of $12,700. In 2018, the available standard deduction went up to $12,000 for single taxpayers and $24,000 for married filing jointly, and it’s been adjusted upward in the years since.
For 2019 and 2020 tax returns, the standard deductions are:
|Filing Status||2019 Standard Deduction||2020 Standard Deduction|
|Married Filing Jointly||$24,400||$24,800|
|Married Filing Separately||$12,200||$12,400|
|Head of Household||$18,350||$18,650|
This means many people who used to itemize now don’t have enough itemized deductions to push them over the higher standard deduction hurdle. And certain tax-planning strategies, like pre-paying state and local taxes or making a big gift to their favorite charity at year-end, might not make sense.
In case you’re searching for ways to reduce your taxable income and think itemizing might still be an option for you, here’s a look at the itemized deductions you can claim on your tax return.
1. Medical expenses
You can deduct any out-of-pocket medical expenses you paid in 2019, but you only get a tax benefit for the costs that exceed 7.5% of your adjusted gross income (AGI), found on line 8b of Form 1040.
Medical expenses can include the premiums you paid for health, dental, vision, and long-term care insurance. They can also include the cost of prescription medications, fees for doctor and dentist visits, lab fees, hospital stays, eyeglasses and contact lenses, surgeries, and ambulance services.
You can’t deduct the cost of cosmetic surgery unless it was necessary to correct a deformity resulting from a congenital abnormality, accident, or disease.
2. State and local taxes
The deduction for state and local taxes has two components:
State and local income taxes OR state and local sales tax: People who live in states that have a state income tax can claim the income taxes they paid during the year. In Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, there are no state income taxes. Taxpayers in those states have the option of deducting state and local sales tax instead.
If you saved your receipts all year, you could deduct the actual sales tax paid. Otherwise, you can use a flat amount determined by the IRS based on your income level, the size of your family, and your zip code. The IRS has a Sales Tax Deduction Calculator to help you find the amount you can deduct, or you can use the tables in the IRS Instructions for Schedule A. If you use the calculated amount, you can add to it any sales tax you paid on major purchases like buying a car or boat or remodeling your home.
You can claim either income taxes or sales taxes, but not both.
Property taxes: If you own real estate, you can deduct the property taxes paid on your primary home, as well as any vacation properties or land you own. You can also deduct the property taxes you pay when registering a car, boat, or another vehicle.
When the TCJA passed in 2017, many taxpayers scrambled to pre-pay their 2018 property taxes before the end of the year so they could take the deduction on their 2017 tax return. But the IRS wasn’t too excited about letting people exploit this potential tax loophole. The agency issued a letter at the end of the year indicating that prepaid property taxes are only deductible if the taxing authority had already made an assessment. In other words, if you have a property tax bill due in April of 2020 and you pay it in December of 2019, you can take the deduction on your 2019 tax return. However, if you don’t yet have your 2020 property tax bill, but you make a payment of $5,000 to your state treasurer in December of 2019 because that’s what you typically owe in property taxes each year, you won’t be able to take the deduction in 2019.
The TCJA also made deducting state and local taxes a little less generous by capping the amount you can claim. Starting in 2018, Congress capped the state and local tax deduction at a combined total of $10,000. Previously, there was no limit. For taxpayers living in high-tax states like New York, New Jersey, California, and Illinois, that cap might cut their available deduction in half.
3. Home mortgage interest
You can deduct interest paid on home mortgage debt of up to $750,000. Before the TCJA, the limit was $1 million of home acquisition debt and $100,000 of home equity debt, for a combined total of $1.1 million. Plus, that home equity debt could be used for any purpose.
The TCJA lowered the limit to a combined total of $750,000 for both your primary mortgage and home equity debt, and also specified that you must have used the home equity debt to “buy, build, or substantially improve” your home. In other words, if you used a home equity loan to pay off credit card debt or pay for your child’s education, the interest on that loan is no longer deductible.
If you paid mortgage insurance premiums, you might be able to deduct those premiums as well. However, your AGI must be less than $109,000 to deduct mortgage insurance premiums ($54,500 if married filing separately). The Mortgage Insurance Premiums Deduction Worksheet in the IRS Instructions for Schedule A can help you calculate your deduction.
4. Gifts to charity
You can claim a deduction for cash or property donated to a qualified tax-exempt organization. Most charities will let you know if they have a 501(c)(3) tax-exempt status, but some organizations, including churches, aren’t required to apply for 501(c)(3) status from the IRS. If you’re not sure whether your charity of choice counts, the IRS’s Tax Exempt Organization Search tool you can use to check their status.
The IRS also requires that you keep good records to support your deduction. The level of documentation depends on whether your donation was cash or property, and the value of that donation. Generally, if you have a written receipt from the charity showing the name and address of the organization, the date of your contribution, and the amount donated, your documentation will pass IRS requirements, although non-cash donations valued at more than $5,000 might require a qualified appraisal. For a more detailed explanation of documentation requirements, check out IRS Publication 526.
5. Casualty and theft losses
If you suffer property damage due to a fire, accident, or natural disaster, you may be able to claim a deduction for your loss. This category of itemized deductions used to cover a wide range of circumstances, but the TCJA changed the rules to only allow a deduction for losses from a federally declared disaster.
You can’t take a deduction for any losses that are covered by insurance, and you have to reduce the loss by $100 before figuring your deduction.
6. Miscellaneous itemized deductions
If you’ve been itemizing deductions for a while, you might notice a few deductions missing from that list. The TCJA eliminated most miscellaneous itemized deductions, including things like investment advisory or management fees, unreimbursed job expenses, and tax preparation fees.
There are still a few miscellaneous itemized deductions available, including gambling losses, amortizable bond premiums, and impairment-related work expenses of a disabled person. You can read more about the available miscellaneous itemized deductions in the Instructions for Schedule A.
Should you itemize your deductions?
The Tax Foundation estimates that less than 14% of taxpayers will itemize under the current law, compared to over 31% of taxpayers who itemized prior to the TCJA. In some cases, that’s a good thing. It makes tax filing simpler when you don’t have to track every medical bill, interest or tax payment, and donation to charity.
But if your estimated itemized deductions are close to the standard deduction available for your filing status, you might want to keep records for any available itemized deductions just in case. At tax time, your tax software or tax preparer can run the numbers both ways to see which method produces a lower tax bill.
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