One of the most common questions we receive is about the difference between taking the standard deduction versus itemizing deductions. With certain tax laws set to sunset in the near future, this is an essential topic to revisit.
What is the Standard Deduction?
The standard deduction is a flat dollar amount that reduces the income you’re taxed on. It varies depending on your filing status (single, married filing jointly, etc.). For the 2024 tax year, the standard deduction is:
Single: $14,600
Married Filing Jointly: $29,200
Head of Household: $21,900
The advantage of the standard deduction is its simplicity—no need to keep track of receipts or expenses throughout the year.
What are Itemized Deductions?
Itemizing deductions involves listing out and deducting specific expenses such as mortgage interest, property taxes, medical expenses, charitable contributions, and more. If your total itemized deductions exceed the standard deduction, itemizing could reduce your taxable income further. However, it requires more detailed record-keeping and the time to compile these expenses at tax time.
When Does it Make Sense to Itemize?
Itemizing makes sense when your deductible expenses exceed the standard deduction. Here are some scenarios where itemizing might be beneficial:
High Mortgage Interest Payments: If you have a substantial mortgage, the interest payments might push your total deductions above the standard deduction.
Significant Charitable Contributions: Large donations to charity can add up quickly, especially if you donate appreciated assets like stocks.
High Medical Expenses: If you’ve had significant out-of-pocket medical expenses that exceed 7.5% of your adjusted gross income (AGI), this can be a compelling reason to itemize.
State and Local Taxes (SALT): Although the Tax Cuts and Jobs Act (TCJA) capped the SALT deduction at $10,000, this could still push some taxpayers over the standard deduction threshold.
Potential Changes on the Horizon
The tax landscape is dynamic, and several provisions of the TCJA are set to sunset after 2025. This means that unless Congress acts, the standard deduction will decrease, and many of the itemized deduction limits may revert to pre-TCJA rules. This could lead to a higher number of taxpayers opting to itemize deductions after 2025, depending on their financial situation.
Key Points to Watch:
Standard Deduction Decrease: The current elevated standard deduction amounts could drop, leading more taxpayers to consider itemizing.
SALT Deduction Cap: The $10,000 cap on state and local taxes may be lifted or adjusted, potentially making itemizing more advantageous for taxpayers in high-tax states.
Miscellaneous Itemized Deductions: Certain deductions, such as unreimbursed employee expenses, were suspended under the TCJA. These might be reinstated, further influencing the itemization decision.
What Should You Do?
Tax planning is key. As we approach 2026, it’s crucial to stay informed about potential changes and consider how they could affect your tax strategy. If you typically take the standard deduction now, it may be worth re-evaluating whether itemizing could be more beneficial in the future, especially if you anticipate significant deductions. If you have any questions, please do not hesitate to contact TrueBlaze Advisors.
Missed last week's article in the series? Access it here:
Understanding Use Tax: What it is and Why it Matters to Your Business