Standard Deduction vs. Itemized Deductions: Which Is Better?
Roughly 90% of taxpayers claim the standard deduction vs. itemized deductions. Should you do the same?
The answer, as with most tax questions, is: it depends. This article will help you decide.
Standard Deduction vs. Itemized Deductions: What’s the Difference?
When you file your tax return, you generally have two options:
- Claim the standard deduction. The standard deduction is a flat amount determined by the IRS based on your filing status. If you claim the standard deduction, you’ll simply enter the available standard deduction on your Form 1040.
- Itemize your deductions. Itemized deductions are what you actually spent on certain deductible expenses, such as medical expenses, state and local taxes, mortgage interest and charitable deductions. If you itemize, you’ll need to list each of these expenses on Schedule A and attach it to your tax return.
Claiming the standard deduction is easier because you don’t have to keep track of what you spent, or hold on to supporting documents like receipts, bank statements, medical bills and tax forms.
However, if your total itemized deductions are greater than the standard deduction available for your filing status, itemizing can lower your tax bill.
For 2021 tax returns (those filed in 2022), the standard deduction numbers to beat are:
- $12,550 for single taxpayers and married individuals filing separate returns
- $18,800 for heads of household
- $25,100 for married couples filing jointly or qualifying widow(er)
Taxpayers age 65 or older or blind can claim higher standard deductions. A worksheet in the IRS Instructions for Form 1040 can help you calculate this amount.
Is Itemizing Deductions Right For You?
Few taxpayers have enough itemized deductions for itemizing to make sense. However, it’s worth looking at your deductions to see whether itemizing can reduce the amount of tax you owe (or give you a bigger tax refund).
To help you out, here are the itemized deductions you may be able to claim on your 2021 tax return.
You can deduct out-of-pocket medical, dental and vision expenses. This can include insurance premiums, doctor co-pays, lab fees and the cost of prescription medications, eyeglasses and contact lenses, hospital stays, surgeries and ambulance services.
But there is a catch: you only get a tax benefit for medical costs that exceed 7.5% of your adjusted gross income (AGI), which you can find on line 11 of your 2021 Form 1040.
For example, if your AGI for 2021 is $100,000, you can only deduct medical expenses greater than $7,500 (7.5% of $100,000).
State and Local Taxes
You can deduct the state and local taxes you paid during the year, including:
- Property taxes
- State and local income taxes OR state and local sales taxes
- Personal property taxes (like those paid when you register a car, boat or motorcycle)
Currently, the IRS limits your total state and local tax deduction to $10,000. For example, say you paid $7,000 in state income taxes and $5,000 in property taxes in 2021. The most you could deduct for 2021 is $10,000—the remaining $2,000 deduction is lost.
Congress is currently discussing a repeal of that cap, but for now, it still applies.
You can deduct mortgage interest paid on your primary residence and one vacation home. However, the IRS limits your mortgage interest deduction to interest paid on up to $750,000 ($375,000 for married filing separate filers) of debt incurred after Dec. 16, 2017. You can deduct higher amounts up to $1,000,000 ($500,000 for married filing separate filers) of debt incurred prior to Dec. 16, 2017.
For tax years 2018 to 2026, you can also deduct interest on a home equity loan or line of credit to the same limits, but to be deductible, the loan proceeds must have been used to “buy, build or substantially improve” your home.
In other words, if you take out a $10,000 home equity loan to remodel your kitchen, it’s deductible. On the other hand, it’s not deductible if you use the loan to refinance high-interest credit card debt.
Prior to 2018, you could take the deduction no matter how the funds were used, but only up to $100,000.
You may also be able to deduct:
- Points paid when you take out or refinance your mortgage
- Mortgage insurance premiums (expires at the end of 2021)
- Interest paid on money borrowed to purchase taxable investments
Gifts to Charity
You can deduct donations of cash and property as long as you donate to a qualified tax-exempt organization. Most charities will let you know whether they are tax-exempt. If you’re not sure, you can look them up using the IRS’s Tax Exempt Organization Search tool.
If you suffer property damage due to a federally declared disaster, such as a wildfire, hurricane or flood, you may be able to deduct your loss. You can find a list of federally declared disasters for 2021 at FEMA.gov.
You can’t claim a deduction for any losses covered by insurance, and generally you have to deduct $100 from each casualty loss incurred during the year before calculating your deduction.
Other Itemized Deductions
The final section of Schedule A is a catchall section for other, less common itemized deductions. These include:
- Gambling losses (to the extent of taxable gambling winnings)
- Amortizable bond premiums
- Impairment-related work expenses of a disabled person
You can learn more about other itemized deductions in the IRS Instructions for Schedule A.
If you have any of these itemized deductions, then deciding whether to itemize comes down to simple math. Add up your itemized deductions and compare the total to the standard deduction available for your filing status.
If your itemized deductions are greater than the standard deduction, then itemizing makes sense for you. If you’re below that threshold, then claiming the standard deduction makes more sense.