4 Tips to Maximize Your Savings With Itemized Deductions

If you can itemize deductions on your tax return instead of taking the standard deduction, this can help you reduce your taxable income and save money at tax time. However, most people can't itemize. According to IRS data, almost 90% of taxpayers take the standard deduction, because that gives them a bigger tax break than itemizing deductions.

But for people who can itemize -- who have itemizable deductions that add up to more than $13,850 for a single person, or $27,700 for a married couple filing jointly in 2023 -- itemized deductions can lead to bigger tax breaks. If you want to maximize your tax savings, it's important to understand which deductions are itemizable, and how to make the most of them.

Here are a few quick tips to use itemized deductions to reduce your taxes.

1. Don't forget the SALT deduction cap

One of the big changes from the 2017 Tax Cuts and Jobs Act that still might be causing confusion for a lot of people's tax prep sessions is the $10,000 SALT deduction cap. This new IRS rule means that you are only allowed to deduct up to $10,000 of state and local taxes ("SALT"), which includes real estate property taxes. Because of this limit, many people in higher-tax states like New York and California might not be able to itemize.

2. Include your mortgage interest

The SALT deduction makes it harder for some homeowners to itemize deductions. But don't forget: you can still itemize home mortgage interest, and tax-deductible interest on home equity loans and HELOCs. You can deduct home mortgage interest that is used to buy, build, or make substantial improvements to the home.

Not every cash-out refinance is eligible for mortgage interest tax deductions; it depends on how you use the money. For example, pulling money out of your home equity to pay off higher-interest credit card debt can be a smart financial move, but it won't be tax-deductible interest. You can only get a tax deduction for the full amount of interest on a cash-out refinance if you use all the money for home improvements.

3. Some medical and dental expenses can be itemized

Have you had a big year of medical expenses? Whether it's welcoming the birth of a new baby, a major surgery, or an expensive dental procedure, you might be able to deduct those healthcare costs from your taxable income. Deductible medical expenses include a wide range of care and services, including prescription drugs, weight-loss programs under diagnosis of a doctor, eye glasses, hearing aids, and laser eye surgery.

However, keep in mind that you can only deduct medical and dental expenses that are greater than 7.5% of your adjusted gross income (AGI). For example, if your AGI is $100,000, that means your medical and dental expenses must be more than $7,500 in order to qualify for this itemized deduction. And you can only itemize the amount that's more than $7,500. If you had $10,000 of medical expenses, you could itemize $2,500.

4. Make extra charitable donations so you can itemize

Lots of itemizable deductions are beyond your control. You can't just decide to go out and pay higher property taxes or incur additional medical expenses. But there's one itemizable deduction that you can decide to get more of: it's called charitable giving. If you are close to having enough itemizable deductions to get over the top of your standard deduction amount, giving a little extra money to charity can help you.

For example, if you're a single person with $8,000 of state and local taxes and $5,000 of home mortgage interest, that makes $13,000. With just another $851, you can itemize. Writing a check to charity for $851 (or $1,000, or more) can boost your tax deductions beyond the "standard" and help you get bigger tax savings.

Bottom line: Most people don't itemize deductions because the standard deduction is a better deal for their taxes. (The best tax prep software can help figure out which deduction is right for you.) But if you have the financial flexibility to donate extra money to charity, giving money to nonprofits can help you get money back at tax time. This is a simple strategy to include charitable giving in your tax planning.