Should You Itemize Your Taxes? Here's How to Know

It's an important decision. Here's how to navigate it.

Filing a tax return can be a quick process, or a time-consuming one. Often, the amount of time you'll spend working on your taxes will hinge on whether you claim the standard deduction on your return versus itemize.

Before we discuss how to make that call, let's quickly review what a tax deduction is in the first place. A tax deduction exempts a portion of your income from taxes. It's different from a tax credit, which is a dollar-for-dollar reduction of your tax liability.

Say you're entitled to a $2,000 tax deduction and you owe the IRS $2,000 for having underpaid your taxes during the year. A $2,000 tax deduction won't wipe out that liability. Rather, it will allow you to not pay taxes on $2,000 of your income.

If the tax rate that applies to you is 22%, that means your $2,000 deduction will result in $440 of actual tax savings, and that amount will come off of your $2,000 bill. A $2,000 tax credit, meanwhile, will actually make it so your $2,000 tax obligation is whittled down to $0.

With that out of the way, you'll need to figure out how to approach deductions on your tax return. And that really boils down to crunching numbers.

The 2021 standard deduction

The standard deduction is set by the IRS and tends to change from year to year. It's also different for each specific filing status.

In 2021, the standard deduction looks like this:

• $12,550 for single tax filers and married couples filing separately
• $18,800 for heads of household
• $25,100 for married couples filing jointly

To see if you should claim the standard deduction versus itemize on your 2021 tax return, you'll need to add up your allowable deductions and see if they exceed your standard deduction. If they do, then itemizing makes sense. If your standard deduction is higher, that's what you should claim. If you're looking at breaking even, you might as well stick with the standard deduction, since it'll be less work.

What deductions can you itemize? You may be eligible to claim a deduction for:

• Interest on your mortgage
• Property taxes
• Medical expenses

Generally speaking, if you're not a homeowner, itemizing won't make sense. Even if you are a homeowner, you may not have enough expenses to justify itemizing. If you don't have high mortgage payments and property taxes, there’s a good chance your total deductions may be below the standard deduction you'd otherwise qualify for.

Revisit your deductions every year

It may be that claiming the standard deduction makes sense for your 2021 tax return, or vice versa. But one thing you should know is that tax rules can change from year to year, as can the standard deduction. It pays to assess your approach to deductions every time you sit down to tackle a return. Or, to put it another way, if you decide that itemizing is a smart move this year, you should run your numbers next year to see if the same holds true.