Should I take itemized or standard deductions?

Tax deductions are great, but which option gets me the best deal?

Deductions are all about saving you money on taxes, and there’s a few options to choose from on your individual tax returns (using Form 1040). You or your accountant can create a custom list of write offs, potentially adding up to a big tax break. Or you can just check a box for easy savings. That’s itemized vs standard deductions in a nutshell.

But is the extra time and effort spent on itemizing your deductions worth it?

Quick look

• Deduction: A reduction of the income used to calculate your taxes.
• Write-off: The term is sometimes used in other contexts, but a tax write-off is just another way of saying tax deduction.
• Are there other types of deductions? Yes! Other categories include business expense deductions and "above-the-line" deductions subtracted directly from your gross income. But standard and itemized are the only deductions available to all taxpayers that you have to choose between. You can't do both standard and itemized.
• Do I have to take any deductions, or can I opt out? Tax software generally won’t let you move forward without checking one of the boxes, but there’s no reason not to take deductions anyway. It's all upside.

Okay, how does this work?

Income taxes are based on your income (surprise!). The more you make in a certain year, the higher your taxes. Taking a deduction subtracts from the income used to calculate your taxes.

For example, let’s say you're a single taxpayer and you made $98,000 in a certain year. If you take a $13,850 deduction (the single standard deduction for 2023), you’d be taxed as if you only made $84,150. This would save you over $3,000 on your tax returns, without any extra work on your part.

Itemizing works the same way, except that instead of a fixed number, your deduction is calculated based on your expenses that year. Be sure to keep careful track!

Standard deductions

The standard deduction takes a fixed amount off your taxable income, with the figure changing depending on things like your marital status.

For 2023, those numbers are:

• Single: $13,850
• Married, filing jointly: $27,700
• Married, filing separately: $13,850
• Head of household: $20,800

Pros

The most obvious advantage to taking the standard deduction is speed and simplicity. No math, no accounting, just file your tax returns. It’s more or less automatic. Taking a standard deduction is probably the single easiest part of tax season.

Speaking of convenience, the standard deductions are available to everyone, regardless of expenses. So unlike the itemized deduction, you’ll always be able to take the standard. You don’t even have to track expenses for the year (though maybe you should anyway).

And it’s not just convenient. There’s a very solid chance that the standard deduction is your best deal. The 2018 Tax Cuts and Jobs Act (TCJA) nearly doubled the standard deductions, making them a more attractive option for the average taxpayer. On top of that, the standard deductions are increased every year to account for inflation. Not bad.

Cons

There’s only one real downside here, but it’s a big one: you might be missing out on extra savings. If you’ve got a long list of deductible expenses, taking an itemized deduction could potentially be a much better deal.

Itemized deductions

Instead of a fixed dollar amount, the itemized deduction will reduce your taxable income by the sum total of all applicable deductions.

What’s an applicable deduction? There’s a long list, and it changes occasionally, but in general you’re looking at things like health insurance premiums, charitable contributions, mortgage interest, and real estate taxes.

Pros

Ideally, you’re taking an itemized deduction because, for you, it adds up to bigger savings vs the standard. That’s the big advantage: itemizing has the potential to reduce your tax bill much further than the standard deduction would.

There’s a vast array of possible deductions you can take, and many taxpayers leave possible deductions on the table, so make sure you check!

Cons

Tax returns can already be complicated and going through your expenses to maximize your tax deduction takes time and expertise. It’s not just a box you can check like the standard deduction.

Anyone can take the standard deduction, but itemized deductions are much more heavily scrutinized. Taking an itemized deduction requires careful documentation for the IRS and runs the risk of a possible audit.

And since the TCJA passed in 2018, itemized deductions have been heavily restricted, while the standard deductions have been boosted. It’s less likely that the average person will get a better deal itemizing.

Still, it’s always worth considering. Itemizing doesn’t always save you money, but when it does, it’s worth the extra effort.

When to itemize instead of taking standard

So, when should you itemize instead of taking the standard deduction? Easy: when itemizing would net you a bigger discount on your taxes.

That’s more likely if:

• You had large out of pocket medical expenses
• You paid mortgage interest and/or real estate taxes
• You had large uninsured casualty or theft losses
• You made substantial charitable donations
• You had significant gambling losses

If any of these conditions apply to you, there’s a good chance you could be saving more through an itemized deduction.

Bottom line

Deductions are a good thing for you. No matter which you take, itemized or standard, you’re probably in for some major tax savings.

Standard deductions take one big chunk off your taxable income. No muss, no fuss, nothing to think about. Just effortless savings.

Itemized deductions add up relevant expenses to calculate your deduction. It’s a little more complicated but potentially saves you more money than the standard deduction.

Not sure if you should be taking standard or itemized deductions? We can help! Schedule a call with the tax experts at DiMercurio Advisors and we’ll get you on track for maximum tax savings.