Do I need to keep track of deductions?

Taxpayers have the option of using the standard deduction or to itemize their deductions. Taking the standard deduction requires no supporting documentation. Itemizing deductions requires you keep up with your documentation and is not the best option if they are less than the standard.

Note: I hear many clients say that they “can’t use” their deductions – this is not necessarily true. It is simply that the tax code gives you more as a standard deduction than you have in deductions. Essentially, this means you are getting free money.

The Standard Deduction
The table below shows the amount of standard deduction that can be used by taxpayers for 2023:

Single/MFSHead of HouseholdMarried Filing Joint
Additional for Over 65/Blind: $1,850 for S or HoH; $1,500 MFJ.

Itemized Deductions
What types of expenses can be used for itemized deductions?
Let’s focus on the most common deductions taxpayers can use. These are medical expenses, state and local taxes, mortgage interest, and charitable contributions.

Medical Expenses must be reduced by 7.5% of your income. Let’s say you had $3,000 in medical expenses, and your AGI is $50,000. 7.5% of your income would be $3,750. $3,000 of medical expenses is less than this amount, meaning you cannot use any of your medical expenses.

Let’s say you had $10,000 in medical expenses with the same AGI. You subtract $3,750 and you could possibly use $6,250 of your medical expenses – but, you’ll want to add the rest of your deductions and see if they exceed the standard.

State and Local Taxes is the next item we’ll explore. Let’s say you paid $2,500 in real estate tax, $4,000 in state tax, and $500 in personal property taxes. This adds up to $7,000. Let’s save that number for later.

Mortgage Interest – if you have a mortgage, you’ll receive a statement from your company highlighting the amount of mortgage interest expense. Let’s say you paid $5,000 in mortgage interest in 2023. You also have a home equity line that you used to consolidate debt. You paid $1,000 in interest on that. Unfortunately, you cannot use home equity interest unless it was used fr the specific purpose of making capital improvements to a residence. So – we have $5,000 we may be able to use.

Charitable Contributions can also be included to see if you meet the criteria to itemize. In 2023, let’s say we contributed $1,000 in cash donations to our favorite charity, and sent $600 in fair market value of items to Goodwill. This gives us $1,600 that we can consider using. Note: if you donate more than $500 in non-cash contributions to any organization, that requires being itemized on a form. It’ll cost more to file that form than the $100 will produce in benefits, so let’s just use the cap of $500.

Let’s add these deductions and see if we qualify
Using the $3,000 in medical bills example, we had no usable medical. Our taxes paid was $7,000. $5,000 in mortgage interest, and $1,500 in charitable donations. This totals $13,500. A single filer gets a standard deduction of $13,850. Using the standard deduction produces $350 of “free” money! If I’m a married filer, the standard deduction is $27,700. This is clearly a much higher benefit!

Using the $10,000 medical bills example, we’ll add $6,250 to our total. This gives us $19,750 in deductions. A single filer would want to itemize deductions, since the amount of deductions exceeds the standard. This provides the best tax benefit.

However, if this was for a married or Head of House filer, $19,750 still falls below what the tax law offers for “free” – so the standard deduction provides the best benefit (and the least amount of work!)

The current tax laws are set to be renewed or expire in 2025. Depending on what happens, you may consider changing your record keeping. For now, hopefully this clarifies how deductions work!

Note: These are not business deductions. W2 filers are unable to use any business expenses, but small business owners and 1099 contractors may be able to deduct expenses. This happens on a different form, and is an entirely different subject!