The Single Best Way to Optimize Your Itemized Deductions

If you have a high enough income and enough deductible expenses to qualify, itemizing your deductions can be a great way to save money on taxes. But many Americans do not itemize. About 87% of tax returns take the standard deduction instead, according to IRS data.

For most of these people, the standard deduction is clearly the better choice; you should always reduce your taxable income by the largest amount possible. Good tax software can help you figure this out. But depending on your tax situation, you might be able to itemize with just a few simple money moves. If you are right on the borderline of having enough itemizable deductions to be bigger than the standard deduction, it might be time to get strategic about your tax planning.

Let's look at what it means to itemize, and discover the best thing you can do to optimize your itemized deductions.

Itemized deductions: What are they?

Not every type of tax deduction is an itemized deduction. To be an itemized deduction, your expense must fall into one of these categories:

• State and local income taxes and real estate taxes: These are included in the $10,000 SALT deduction cap.
• State and local sales taxes: You have to choose whether to deduct your state and local income taxes or sales taxes -- but you can't deduct both. Most people are probably better off deducting state and local income taxes. But use tax prep software to double-check!
• Personal property taxes: This might include your annual fees for vehicle registration.
• Mortgage interest: This can include your primary home, a second home, home equity loans, or home equity lines of credit (HELOCs), as long as you are using the mortgage to buy, build, or improve a home.
• Disaster losses: If you have suffered personal casualty losses or theft losses in a federally declared disaster, and the losses are more than 10% of your adjusted gross income (AGI), you can deduct them.
• Some medical and dental expenses: To deduct these healthcare costs, your expenses must be more than 7.5% of your AGI, and you can only deduct that extra portion.
• Gifts to charities: Donations of cash, check, or property to qualified tax-exempt nonprofit organizations can be tax deductible, but only if you itemize.

If all of your itemizable deductions add up to more than your standard deduction amount -- which in 2023 is $13,850 for single filers and $27,700 for married couples filing jointly -- then you should itemize. But if not, take the standard deduction.

Basically: If you can itemize, you can get extra tax deductions, above and beyond the standard amount. Not everyone has the right mix of expenses to be able to itemize. But if you have some financial flexibility, you can make strategic tax moves to boost your deductions enough to itemize and reduce your taxable income.

How to get extra itemized deductions: Donate to charity

If you're almost in range of going over the standard deduction, the easiest way to itemize is to make extra charitable donations.

For example, if you're a single person who lives in Texas (a state with no income tax), and you pay $6,000 of home mortgage interest and $5,000 of local property taxes per year, that makes $11,000 of itemizable deductions. If you give another $3,000 to charity, you'll be able to claim $14,000 of itemized deductions -- saving you more money on taxes.

Or, let's look at another example: You're a married couple filing jointly in California (a place with relatively high state income taxes), and you own your home. You're paying $10,000 of state income taxes and property taxes, $10,000 a year of mortgage interest, and $3,000 of medical expenses (above 7.5% of AGI). This makes $23,000 of itemizable deductions -- leaving you $4,700 below the standard deduction.

But what if you could give more money to charity? If you give $392 to charity per month, you'd have $4,704 of annual charitable donations -- and that amount would put you over the top for a total of $27,704. Now you can itemize deductions. And the more you give to charity beyond this level, the more you save on taxes.

Bottom line: Not everyone has enough financial flexibility to make strategic tax planning moves. Most taxpayers are better off with the standard deduction. But if you have some extra cash in your bank account, or extra room in your budget, donating to charity can help you exceed the standard deduction and itemize. Claiming itemized tax deductions is the only way to get charitable giving tax write-offs.