Taxes: Here's how to know if you should itemize
At tax time, one major decision can help you maximize your tax benefits: You can either itemize your deductions or take the standard deduction — but you can’t do both. So how do you figure out which one is right for you?
Most taxpayers go with the standard deduction, especially after the Tax Cuts and Jobs Act overhauled the federal tax code starting in 2018. Almost 90% of taxpayers take the standard deduction now, according to estimates from TurboTax and H&R Block.
Here’s what you need to know about both strategies.
Standard deduction
The standard deduction is a set amount that lowers taxable income. The set amount changes each year and often varies by the taxpayer’s filing status (single filer, married filing jointly, married filing separately, and head of household), along with other factors, such as your age or whether another taxpayer can claim you as a dependent.
For the 2020 tax year, the standard deduction amounts are:
$12,400 if you’re single or married filing separately
$18,650 for heads of household
$24,800 for married couples filing jointly
Itemized deductions
Itemizing is worth doing if all of your deductions add up to more than the amount of the standard deduction that applies to you. In this case, you’ll owe less taxes and potentially get a larger tax refund.
Certain situations make it more likely that you may want to itemize your taxes based on the deductions available to you. These include:
Large uninsured medical and dental expenses
Interest and taxes on your home
Large uninsured casualty or theft losses
Large contributions to qualified charities
Most tax software can help you itemize your deductions. You’ll report the expenses on Schedule A, Itemized Deductions when filing your income tax return.
Doing the math
Choosing the best tax strategy for you comes down to simple math:
Add up your itemized expenses.
Compare that amount to your standard deduction.
Decide whether itemizing is to your advantage.
Take a look at one example. Say you paid $10,000 in interest on a home equity loan and a primary mortgage in 2020, and you’re a single filer. Because $10,000 is lower than the standard deduction of $12,400, it won’t make sense to itemize. You’d be better off claiming the standard deduction.
You can use the Internal Revenue Service’s Interactive Tax Assistant, How Much Is My Standard Deduction? to determine the amount of your standard deduction and whether you should itemize your deductions.
Above-the-line deductions
Some deductions you can take without itemizing your taxes. These include deductions for:
IRA contributions
Health savings account contributions
Student loan interest
Educator expense
Self-employment expenses
Alimony
Moving costs for military members
There’s a new above-the-line deduction this year, too. Thanks to the CARES Act, cash donations to charitable organizations up to $300 made last year can be deducted from your 2020 taxes without itemizing. Make sure to have receipts or other documents that show your contributions.
Read more information and tips in our Taxes section
Read more personal finance information, news, and tips on Cashay
