What is Itemized deductions?

Itemized deductions are specific expenses, like mortgage interest, state taxes, and charitable donations, that reduce your taxable income. Governed by Schedule A of Form 1040, itemized deductions cover expenses such as state and local taxes (SALT) up to statutory limits, home mortgage interest, charitable contributions, and qualified medical expenses that exceed a percentage of AGI. Taxpayers choose to itemize when their total qualifying expenses exceed the standard deduction.

Under current tax rules, the SALT deduction is capped at $10,000 ($5,000 if married filing separately). Mortgage interest is deductible on acquisition debt up to $750,000 for primary and secondary residences. Medical expenses are deductible only to the extent they exceed 7.5% of the taxpayer's AGI.

Itemizing requires keeping detailed receipts and documentation to justify each deduction in the event of an IRS audit. It is more common among homeowners, individuals with high state tax burdens, and major charitable donors.

To optimize the benefit of itemizing, taxpayers often utilize a strategy known as deduction bunching. By consolidating discretionary expenses, such as making multiple years of charitable donations in a single tax year (often through a donor-advised fund) or pre-paying property taxes, taxpayers can exceed the standard deduction threshold in one year and claim the standard deduction in the next. It is also important to note that charitable cash contributions to public charities are generally capped at 60% of AGI, while donations of appreciated long-term securities are capped at 30% of AGI but offer the dual benefit of avoiding capital gains taxes. Furthermore, miscellaneous itemized deductions (such as unreimbursed employee business expenses) remain suspended under current federal tax codes, and casualty losses are only deductible if they occur within a federally declared disaster area.