Why More Americans Are Turning to Itemized Deductions This Year

Itemizing tax deductions lost its luster for most taxpayers with the passage of the Tax Cuts and Jobs Act of 2017. The law nearly doubled the standard deduction, which is the amount any taxpayer can subtract from their tax bill, regardless of their actual expenses. For tax year 2018, the first year that the new law was in effect, only 11.4% of taxpayers itemized deductions, according to the IRS.

But this year, more Americans may benefit from itemizing deductions. The reason? Rising interest rates.

Why more taxpayers can benefit from itemizing

You can only itemize tax deductions if you don't claim the standard deduction. For tax year 2023, i.e., taxes that are due by April 15, 2024, the standard deduction by tax-filing status is:

• $13,850: Single or married filing separately
• $20,800: Head of household
• $27,700: Married filing jointly

Some common deductions you can take if you're itemizing include:

• Mortgage interest on up to two homes
• Interest on a home equity loan or home equity line of credit (HELOC) if the money is used to substantially improve the residence
• State and local income taxes, sales taxes, and property taxes
• Charitable donations
• Unreimbursed medical and dental expenses that exceed 7.5% of your adjusted gross income (AGI)

If you recently bought a home or borrowed money to improve your home, itemizing could make a lot more sense than it did in recent tax years because you probably paid a significant amount in interest.

For example, suppose you got a $350,000 mortgage at the beginning of 2021 and locked in a 3% interest rate. If you have a 30-year fixed mortgage, you would have paid $10,400 in interest during the first 12 months of the loan. That's a hefty sum, but it still would have been lower than the 2021 standard deductions of $12,550 for single filers and $18,800 for married couples filing a joint tax return.

Now let's say you borrowed $350,000 in January 2023 to buy a home. But because interest rates had risen, your interest rate was 6%. During the first year of the loan, you'd pay $20,883 in interest. If you're a single filer, itemizing now makes sense because your interest payments were higher than the standard deduction. Even if you're married and filing jointly, itemizing may still make sense when you factor in other deductions, like property taxes.

Should you itemize or claim the standard deduction?

The answer to this question is: Do whichever results in the lower tax bill. If your itemized deductions add up to more than the standard deduction, itemizing is the right move. But if the sum of your itemized deductions is less than the standard deduction, going with the standard deduction makes sense.

Be aware, though, that some deductions are known as above-the-line deductions, meaning you can claim them even if you don't itemize them. Examples include traditional IRA contributions (assuming you meet the eligibility requirements to deduct them), health savings account (HSA) contributions, and interest paid on a loan for education.

The best tax-filing software typically makes it easy to figure out whether to claim the standard deduction vs. itemize. But if you have any questions about what you're allowed to deduct or if your tax situation is complicated, be sure to work with a tax professional.