Income Insights: Understanding Itemized Deductions

Understanding Itemized Deductions

Deductions are expenses that taxpayers can claim on their personal income tax returns to reduce their taxable income. Instead of taking the standard deduction, which is a fixed dollar amount, taxpayers can choose to itemize deductions on IRS Form 1040 Schedule A.

The Tax Cuts and Jobs Act (TCJA) dramatically increased the standard deduction, resulting in many filers no longer itemizing their deductions. For 2024, the standard deduction is $14,600 for filers who are single or married filing separately, $29,200 for married filing jointly, and $21,900 for heads of household. In 2025, the standard deduction will increase to $15,000 for filers who are single or married filing separately, $30,000 for married filing jointly, and $22,500 for heads of household. Should the TCJA be allowed to sunset at the end of 2025 as scheduled, the standard deduction would decrease by almost one-half in 2026; many filers who do not currently itemize would likely go back to doing so.

To help minimize taxable income, it’s important to understand the types of expenses that qualify as itemized deductions:

Medical and dental expenses
Most medical and dental expenses that exceed 7.5% of adjusted gross income (AGI) can be deducted. This provision was not altered by the TCJA.

State and local taxes (SALT)
State and local taxes, including sales tax, property tax, and personal property tax, can be deducted up to $10,000 per year for all filing statuses. The $10,000 SALT limit was created by the TCJA. Should the TCJA expire, taxpayers would not be capped on the amount of SALT they are able to deduct. For more on SALT, read “Understanding the SALT Deduction.”

Home mortgage interest
Interest paid on the first $750,000 of a mortgage can be deducted. This limit applies to all filing statuses and was put in place by the TCJA. The exception is for mortgages in place prior to December 16, 2017. Taxpayers with those preexisting mortgages may deduct interest on the first $1 million of mortgage debt. Should the TCJA expire, the $1 million limitation would apply to all taxpayers.

Investment interest expense
Interest paid on funds borrowed to purchase taxable investments is deductible up to the amount of the net investment income.

Charitable donations
Amounts given to charity can be deducted subject to certain limits. Most charitable contributions of cash to public charities can be deducted up to 60% of AGI under the TCJA while other forms of charitable contributions are subject to stricter limitations. Should the TCJA sunset, donations of cash to public charities would revert to being deductible up to only 50% of the taxpayer’s AGI.

Additional expenses
Expenses such as casualty and theft losses (subject to certain limits), gambling losses, and federal tax paid on income in respect to decedent and several other categories may also be deducted.

Taxpayers should closely track all deductible expenses and understand how they compare with the standard deduction. Taxpayers on the cusp of itemizing may benefit from bunching deductible expenses together in order to maximize their tax benefit.

Allspring Global Investments does not provide accounting, legal, or tax advice or investment recommendations. Any tax or legal information on this page is merely a summary of our understanding and interpretations of some of the current income tax regulations and is not exhaustive. Investors should consult their tax advisor or legal counsel for advice and information concerning their particular situation.