Maximize Your Deductions: Is Itemizing Still Worth the Effort in Light of the Increased Standard Deduction?

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When it comes to taxes, there are two routes you can take when filing – the standard deduction or itemized deductions. The standard deduction is like a freebie from Uncle Sam, meaning it is already built into your taxes. When it comes to itemized deductions, think of them more as a buffet. You can choose which items you will deduct to reduce your taxable income. 

Below we’ll discuss the nuances of each deduction category to help you decide which type (standard or itemized) of deduction is right for you.

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Standard vs Itemized Deductions 

What is a Standard Deduction?

The standard deduction is a set amount you can subtract from your taxable income, like a coupon from the government. The dollar amount (as you’ll find out below) fluctuates every tax year to stave off inflation and cost of living increases. 

What are Itemized Deductions?

Itemized deductions are expense categories (determined by the government) that you can take advantage of to reduce your taxable income.

The only downside to going this route is that you will have to keep accurate track of all your expenses and save the documentation for them over the course of the year.  Plus, not every "expense" is eligible for itemizing.

2022 Standard Deduction Increase

The increases we have been seeing in the standard deduction first came to the scene in 2017 with President Trump's Tax Cuts and Jobs Act. When the bill became effective it essentially doubled the standard deduction amount. 

Since then we have seen the standard deduction limit increase due to “indexing”. That means it is consistently reviewed every year and adjusted to meet the demands of inflation and cost of living increases. 

The standard deduction will increase by 7% from 2022 to 2023. However, we saw inflation reach a 40-year high of 9.1% in 2022. The new standard deduction increase will help close the gap, but it won't completely solve the issue.

Source

When Does it Makes Sense to Itemize

There is really only one situation when you should choose to itemize over opting for the standard deduction. That is when your list of itemized deductions surpasses the amount the standard deduction will save you. 

An example for a single filer:  

Let's say this single filer has expenses that he/she can itemize which equates to $14,500.

2022 Itemized Expenses – $14,500

The single filer would then compare how those expenses stack up against the standard deduction.

2022 Standard Deduction – $12,950

In this case, the individual would choose to itemize their taxes because they would be benefiting from an additional $1,550 ($14,500 - $12,950) in reduction to their taxable income. 

Eligible Itemization Categories

To further reiterate, not all expenses are eligible for an itemized deduction. Some deductions that don't qualify include:

• Mortgage interest on loan amount over $750,000
• State income, sales and property tax in excess of $10,000
• Tax preparation expenses
• Natural disaster losses (unless it was federally declared a disaster)

In the eyes of the IRS, these categories are eligible to be itemized to reduce your taxable income. 

• State income, sales and property tax under $10,000
• Real estate taxes
• Mortgage insurance
• Mortgage loan interest under $750,000
• Disaster losses
• Gifts to charity 
• Medical expenses
• Dental expenses 
• Business expenses (such as travel)

Is Itemizing Worth it?

When it comes to choosing between itemizing and taking the standard deduction, it's important to consider the amount of work required for each option. Itemizing requires you to keep track of specific expenses throughout the year and have the necessary receipts and documentation on hand in case of an audit (which can occur up to 7 years after you've filed your tax return). 

On the other hand, taking the standard deduction is a simpler option as you don't have to keep track of any additional information. It's beneficial to weigh the amount of effort required against any potential savings. Ultimately, it depends on your individual situation and what works best for you.

Frequently Asked Questions

• Is Standard or Itemized Deduction Better?

  If you itemize your deductions, you may be able to claim more deductions than you would be able to with the standard deduction. By claiming more through itemization, you will reduce your taxable income, which in turn will lower the amount of taxes you owe. This won’t always be the case and itemizing deductions can have many sticking points.

• What is the Biggest Drawback of Itemizing Taxes?

  Itemizing your deductions requires more time and paperwork as compared to taking the standard deduction. While it may take more effort to itemize, it can sometimes result in larger deductions and ultimately lower your taxable income if the total value of your itemized deductions is more than the standard deduction.

• Do Most People Take the Standard Deduction?

  Yes, the majority of taxpayers take the standard deduction when filing their taxes. The standard deduction is a fixed dollar amount that reduces the amount of income on which you are taxed. It's a simpler option as it eliminates the need to keep track of specific expenses and receipts, as opposed to itemizing deductions.