Itemized Deductions: Definition and Impact on Taxes

To put it simply, itemized deductions are certain expenses a taxpayer incurred that may reduce the taxable income. In this article, find out more about itemized deductions and how they leave an impact on taxes!

Income Tax Return [Photo: Outlook Money]

According to an article in NerdWallet, itemized deductions are expenses that are authorized by the Internal Revenue Service (IRS) to reduce the taxable income. Unfortunately, a taxpayer cannot take both the itemized deduction and standard deduction on their tax returns. What is important is to learn which method saves more money. If the standard deduction is less than the itemized deductions, a taxpayer should itemize. However, if the standard deduction is more than the itemized deduction, it might be better to take the standard deduction.

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Advantages on Taxes

According to LaPonsie, a taxpayer can claim more expenses with itemized deductions. Some of the expenses allowed with itemization are medical bills, property taxes, and mortgage interest. Some of these types of expenses have limitations. However, taxpayers with large mortgage interests may receive a larger deduction by itemizing charitable donations.

Furthermore, a taxpayer can save more money with itemized deductions. This is because more deductions can be included when itemizing which provides the taxpayer with a larger tax refund. However, the amount of money the itemized deductions will save still depends on the taxpayer’s tax bracket.

Disadvantages on Taxes

On the contrary, itemized deductions take more effort and more paperwork. Unlike standard deductions, itemizing deductions is a manual process. This process requires collecting documentation and listing expenses. Sometimes, one may find this time-consuming process to be not worth the effort when the reduced taxable income is not enough.

Furthermore, there are also restrictions on some itemized deductions. For instance, the Tax Cuts and Jobs Act limits the itemized deduction for state and local taxes. For home equity loans borrowed for purposes other than renovation, the interest is also not deductible anymore. For new mortgages, only the interest on the first $750,000 can be deducted. Lastly, for medical and dental expenses, only those in excess of 7.5% of the adjusted gross income can be itemized.

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