Unexpected Benefits of Choosing Itemized Deductions Over Standard

Unless you spend lots of time hanging out with accountants, or you are passionate about reading the questionnaires on your tax software, most Americans probably don't understand the differences between choosing itemized deductions over standard. The fact is, most Americans don't need to decide whether to itemize deductions. IRS data shows that about 87% of American taxpayers take the standard deduction.

And for most people, the standard deduction is good enough. If you're a typical middle-class or working-class taxpayer, even if you own a home and pay some mortgage interest and property taxes, you probably still won't have a big enough pile of deductions to itemize. If you're part of a married couple in a state like California or New York that has high state and local income and property taxes, you're only allowed to deduct $10,000 of those "SALT" taxes -- which makes it harder for you to amass enough itemizable deductions to beat the standard deduction.

However, if you move a little further up the income ladder, things get interesting. If you can afford to pay additional (deductible) expenses over the course of the year, you might find that choosing itemized deductions over the standard deduction can make a big difference to your taxes.

Let's look at a few unexpected benefits of choosing itemized deductions over standard.

Benefit 1: You can reduce your taxable income (and your tax bill)

The biggest reason why people want to itemize deductions is because it gives them a larger number to subtract from their taxable income. The standard deduction for 2023 is $13,850 for single people, and $27,700 for married couples (filing jointly).

As a taxpayer, you should always take the biggest deduction you're allowed to use. For most people, that's the standard deduction. But for someone who pays a lot of mortgage interest, who can deduct the full $10,000 of state and local taxes, and who has other itemizable deductions (like giving money to charity), all of a sudden, the situation looks different.

For example, let's consider a single guy named Tony who lives in New York. Tony has a high income (adjustable gross income of $150,000) and owns his home. He's paying lots of state income tax to New York and local real estate taxes to his local city ($10,000 of SALT deductions), and he pays mortgage interest of $9,000 per year. Because Tony has $19,000 of itemizable deductions, and his standard deduction amount would only be $13,850, he can itemize.

Here's what Tony's taxes look like because he can itemize deductions, compared to what he would pay with only the standard deduction:

So in this case, being able to itemize deductions saved Tony $1,236 on federal income taxes.

Benefit 2: You can get charitable giving write-offs

Many people assume that all charitable contributions are tax-deductible. This isn't true. Because of IRS rule changes in the Tax Cuts and Jobs Act of 2017, people are only allowed to get tax deductions for charitable donations if they itemize their tax deductions. Anyone who takes the standard deduction can't get a tax break for their charitable gifts, no matter how generous they are.

So this means that if you want a tax break for your charitable giving, you need to make sure your itemizable deductions add up to be more than the standard deduction. Throughout the year, pay attention to how much you're spending on home mortgage interest, state income taxes (if your state collects an income tax), and property taxes. Use tax software to understand just how close (or how far) you were from itemizing on last year's tax return. If it turns out that you only need to give another $1,000 or $2,000 to charity to be able to itemize, maybe you should dig deep and give even more generously.

For people who have enough financial flexibility to itemize deductions and write a big year-end check to charity, charitable giving can become a useful tax-planning strategy. Some people can choose to reduce their taxable income by another few thousand dollars, while benefiting a good cause.

Benefit 3: You can deduct some medical and dental expenses

If you've had an expensive year of healthcare bills, such as a major surgery, dental procedures, or the birth of a new baby, you might be able to use itemized deductions to get a tax break. As part of the rules for itemized deductions, people can deduct the portion of their qualified medical and dental expenses that add up to be more than 7.5% of Adjusted Gross Income (AGI).

For example, if you have an AGI of $90,000, and you racked up $12,000 of medical bills, you can deduct: $12,000 – ($90,000 x 0.075). This comes out to: $12,000 – $6,750 = $5,250 of itemizable medical expense deductions.

Deductible medical expenses include prescription drugs and insulin, eyeglasses, hearing aids, smoking-cessation programs, laser eye surgery, and weight loss programs. Just make sure that your total healthcare costs add up to more than 7.5% of your AGI, and you might be able to get a tax break to compensate for those big expenses.

Bottom line: Choosing itemized deductions over standard can make a difference to your taxes, especially if you have enough cash to make some strategic donations to charity. If you've had an unfortunate year with lots of extra medical bills, itemizing can also help you recoup some of that money.