I Deduct the Interest Paid on My Mortgage. Are You Sure?

I Deduct the Interest Paid on My Mortgage. Are You Sure?

March 14, 2024

When it comes to taxes, understanding the differences between the standard deduction and itemized deductions can significantly impact your tax return. Let's dive into each to understand how they differ.

Standard Deduction:

The standard deduction is a predetermined amount set by the IRS that reduces the amount of income on which you are taxed. It serves as a simplified way to reduce your taxable income without the need for detailed record-keeping or receipts. The standard deduction amount can vary depending on your filing status, such as single, married filing jointly, married filing separately, or head of household.

For tax year 2023 the standard deduction for a single filer is $13,850, while for married couples filing jointly, it is $27,700. These amounts are subject to change annually, so it's essential to check the current figures each tax year.

Itemized Deductions:

Itemized deductions, on the other hand, allow taxpayers to deduct specific expenses they incur throughout the tax year. These expenses may include but are not limited to:

  1. Medical and dental expenses exceeding a certain percentage of your adjusted gross income (AGI).
  2. State and local income taxes or sales taxes, depending on which is higher.
  3. Mortgage interest and property taxes.
  4. Charitable donations.
  5. Unreimbursed job-related expenses.
  6. Certain miscellaneous deductions, such as investment expenses or tax preparation fees.

To claim itemized deductions, you must keep detailed records and receipts of each eligible expense. While itemizing deductions can potentially result in a larger tax benefit than taking the standard deduction, it requires more effort and documentation.

Choosing Between Standard and Itemized Deductions:

The decision to take the standard deduction or itemize deductions depends on your individual financial situation. Here are some factors to consider:

  1. Amount of Deductions: Calculate the total of your potential itemized deductions compared to the standard deduction. If your itemized deductions exceed the standard deduction amount for your filing status, itemizing may be more advantageous.

  2. Simplicity vs. Complexity: Opting for the standard deduction is simpler and requires less effort in record-keeping and documentation. However, itemizing deductions may yield a higher tax benefit if you have substantial eligible expenses.

  3. Life Changes: Certain life events, such as buying a home, significant medical expenses, or making large charitable contributions, can significantly impact whether itemizing deductions is more beneficial.

  4. Tax Law Changes: Stay informed about changes in tax laws, as these can affect the standard deduction amount and eligibility for certain itemized deductions.

Ultimately, the choice between the standard deduction and itemized deductions comes down to which method results in the greatest tax savings for your unique circumstances. We recommend consulting with a tax professional to help you navigate the complexities of tax deductions and ensure you're maximizing your tax benefits. By understanding the differences between these deduction options, you can make informed decisions to optimize your tax strategy and keep more money in your pocket come tax time.

This helpful chart below from Nerd Wallet helps further differentiate. 

This information is not intended to be a substitute for specific, individualized tax or legal advice. Neither LPL Financial, nor its registered representatives, offer tax or legal advice. We recommend that you discuss your specific situation with a qualified tax or legal advisor.