What is an Itemized Deduction?
And should you hunt for them?
We are often asked about things like medical expenses or that extra $25 donation and whether you should dig all of those things up. Under the current tax law, for many, the answer is probably not.
You get the higher of your standard deduction or itemized deductions. For the tax year 2024, the married filing joint standard deduction is $29,200. For those who are elderly or blind, it is even more. When we have such a high standard deduction currently, fewer taxpayers will “itemize” their deductions. In addition to the high standard deduction, there are certain thresholds that further limit itemized deductions.
The four main itemized deductions, in general, are medical expenses, State and Local Taxes (SALT), mortgage interest, and charitable donations.
Medical Expenses
Generally, unless you are paying for assisted living expenses or nursing care, most people are not able to deduct medical expenses. Why? To deduct medical expenses, you have to exceed 7.5% of your adjusted gross income (AGI). If you exceed this threshold, then you can add any medical expenses you paid to your total itemized deductions. Even under a high-deductible health plan, most will still hit their deductibles and/or stop-loss limits before they qualify for a deduction.
SALT
This deduction has made some big headlines under our current tax law when a limit was imposed on this deduction of no more than $10,000. The two main focuses in this category are property taxes and state taxes (for those who live in a state with a state income tax). Once you have a total of $10,000, no further deduction is allowed currently. So, the maximum you get towards your itemized deductions is $10,000.
Mortgage Interest
Mortgage interest on a primary or second home can be deductible. There are limits in most cases on the total mortgage value you can have, and your interest deduction could be limited if you are over these loan limits. For many, the maximum loan limit is $750,000. In some cases, it could be as high as $1 million. Regardless, the amount we see on average for a deduction in this category is approximately $12-$15,000.
Charitable Donations
This amount is anything you have donated to a qualified charity during the calendar year. For amounts over $250, you are required to have a contemporaneous written acknowledgment from the qualified organization indicating the amount and that no goods or services were received. For non-cash contributions, once you reach $500 or more, a separate form must be filed.
This summarizes the main categories of itemized deductions. If you do the rough math, you can see that the first category is likely $0, the second is capped at $10,000, and if your mortgage interest runs $15,000, without charities, you are at $25,000. To have any benefit of itemizing your deductions, you need to have more than $4,200 to charities in this example.
If you are gathering documentation to provide to your accountant and wondering how much digging through records you need to do for medical receipts or that extra $25 you gave to your favorite charity, the answer in many cases is probably none. I may have just saved you a bunch of time!
As always, reach out to your KT Tax Advisor for any questions regarding your specific situation.
