What Are Itemized Tax Deductions?

Itemized tax deductions are a few types of specific expenses -- such as medical expenses, home mortgage interest, and some state and local taxes -- that can be deducted from your income when filing your tax return. However, most Americans do not qualify to use itemized deductions, and can get a bigger tax break by taking the standard deduction instead.

Itemized deductions are often misunderstood. Many Americans incorrectly assume they can deduct all kinds of personal expenses from their taxes. But the IRS rules for itemized deductions have changed significantly in the past few years.

Let's look at the new rules of itemized tax deductions, and how these deductions can help you save money on taxes -- but only if you qualify.

The new rules of itemized deductions after 2018

It's become conventional wisdom in America that when you file taxes, you can get tax write-offs for certain things, like home mortgage interest or gifts to charity. A few years ago, for many people this might have been true.

But with the passage of the Tax Cuts and Jobs Act of 2017, the IRS rules changed. The standard deduction increased significantly, and the amount that people could deduct for state and local taxes was capped at $10,000 per household. Ever since the 2018 tax year, most Americans have not been able to itemize their deductions. According to IRS data, approximately 87% of U.S. tax returns take the standard deduction.

Taking the standard deduction (instead of itemizing) is the right move if it gives you a bigger tax break and makes it easier to file your taxes. But taking the standard deduction means you cannot itemize, and cannot get a tax break for your gifts to charity, your home mortgage interest, and many other expenses.

Which types of expenses can be itemized deductions?

Here's list of the most common types of expenses that count as itemized deductions:

Medical and dental expenses (above a certain limit)

If you've had an expensive year of out-of-pocket medical expenses, such as a major surgery, or the birth of a baby, you might be able to deduct those medical bills with itemized deductions. These deductible expenses include laser eye surgery, prescription medicines, and long-term care insurance premiums.

However, you can only deduct medical and dental expenses in the amount that is greater than 7.5% of your modified adjusted gross income (AGI). So if your modified AGI is $100,000, and you had $10,000 of medical expenses, you can only deduct $2,500 of those expenses.

State and local taxes (up to $10,000)

You can only deduct up to $10,000 of state and local taxes per household. This is called the "SALT deduction cap," and it has made it more difficult for taxpayers in high-tax states to itemize. The $10,000 SALT limit includes state and local:

• Real estate taxes (or "property taxes," as most homeowners call them)
• Personal property taxes (such as the vehicle registration fee you pay to renew your car license plate each year)
• Income taxes or sales taxes (you can choose whether to deduct your sales or income taxes, whichever is bigger; income tax might be the better choice for most people)

A few other taxes can also be deductible, such as income taxes paid to a foreign government, or generation skipping taxes for some income paid by a trust.

Mortgage interest (and other interest)

If you own a higher-priced home and are paying a large amount of home mortgage interest, or if you have borrowed money to purchase investment properties, this tax-deductible interest could help you. Itemized deductions for interest can include:

• Home mortgage interest that you paid on your main home or second home, including home equity loans and refinanced mortgages. The mortgage interest must be used to build, buy, or make improvements to a home.
• Some investment interest for interest paid on loans taken out to buy investment property.

Gifts to charity

If you give money or property to qualified tax-exempt nonprofit organizations, you can include these charitable donations as itemized deductions. Nonprofits that qualify for tax-deductible donations are also called 501(c)(3) organizations. They include:

• Churches and other religious organizations
• Charities like the American Cancer Society and the United Way
• Educational organizations like museums, schools, colleges and universities
• Veterans' organizations
• Nonprofit hospitals and medical research centers

If you can afford to make extra donations to charity at the end of the year, this can boost your itemized deductions and lower your tax bill.

Casualty and theft losses

If your home or property is damaged or if you are a victim of theft during a federally declared disaster, you can claim some of those losses as itemized deductions. But the disaster losses must be greater than $100, and more than 10% of your adjusted gross income (AGI).

Gambling losses

Gambling losses, such as money spent on non-winning lottery tickets, can be deductible. But the IRS requires you to keep careful records of your gambling wins and losses. The amount of gambling losses you deduct cannot be larger than the amount of income you report on your tax return from gambling winnings.

Who can take itemized deductions vs. standard deduction

Remember: If you want to itemize, your total dollar amount of all the items listed above needs to be more than the standard deduction. For 2023 taxes (the tax return that is due in April 2024), the standard deduction is $27,700 for married couples filing jointly, and $13,850 for single filers.

Here are a few examples of taxpayers who want to itemize their deductions:

Example No. 1: Single homeowner in Texas

Bob is single and owns a home. He lives in Texas, where there is no state income tax, but he pays property taxes of $6,000 per year and mortgage interest of $7,000 per year. Bob also donates $300 per month to his church.

Bob's standard deduction amount for 2023 is $13,850. Let's see if he can get over that limit to be able to itemize:

Bob can itemize deductions! This lets him deduct an extra $2,750 from his taxable income compared to the standard deduction.

Example No. 2: Married couple in Minnesota with medical bills

Joe and Karen are a married couple (filing jointly) who live in Minnesota with a combined adjusted gross income (AGI) of $100,000. They pay over $10,000 in state income taxes and property taxes, $6,000 of home mortgage interest, and out-of-pocket medical expenses of $10,000 ($2,500 over the 7.5% AGI limit).

Can Joe and Karen itemize? Let's find out:

Sorry, Joe and Karen. Even with all those medical bills, they don't have enough deductions to itemize. They should take the standard deduction of $27,700.

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Still have questions?

Here are some other questions we've answered:

• How Do Taxes on Investments Work
• How to File for an Extension on My Taxes
• How to Appeal Property Taxes