Itemized Deduction

What Is an Itemized Deduction?

An itemized deduction is a category of qualifying expense that a taxpayer can list individually on a tax return to reduce taxable income. Instead of accepting the fixed amount the tax code allows every filer, the taxpayer adds up eligible costs in categories such as mortgage interest, state and local taxes, charitable gifts, and certain medical expenses. The total of these items is then subtracted from adjusted gross income.

How It Works

Taxpayers compare two figures: the total of their itemized deductions and the standard deduction for their filing status. They generally use whichever is larger, since that produces the lower taxable income. Choosing to itemize means filing a schedule with the detailed expenses and keeping records that support each one.

Tax law sets rules for many categories. For example, some expenses are only deductible after exceeding a percentage of income, and some state and local tax amounts are subject to an overall cap. Because these rules and limits change over time, taxpayers should check the current instructions from the relevant tax authority.

An Example

Suppose a single filer pays a mortgage that produces deductible interest, donates to a qualified charity, and pays state income taxes. If those items together total more than the standard deduction available to that filer, itemizing reduces taxable income further. If they total less, the standard deduction gives the larger reduction, and itemizing would not lower the tax bill.

Why It Matters to Investors

Investors may be affected in several ways. Certain investment-related costs, such as interest on money borrowed to buy taxable investments, can sometimes be itemized. Charitable gifts of appreciated stock may also be relevant to itemizing decisions. Because the choice depends on each person's full financial picture, the calculation is usually worth reviewing each tax year.