Homeowners have two choices when claiming deductions to reduce their taxable income: the standard or itemized deduction. But which one is better to maximize savings?
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As the April 15 tax deadline approaches, here’s what you need to know about claiming deductions on your tax return.
Standard Deduction
The standard deduction is a flat-dollar reduction to your adjusted gross income (AGI). For the 2024 tax year, the standard deduction for individuals is $14,600 and $29,200 for married filing jointly.
For example, if your AGI was $85,000 in 2024 and you claim the standard deduction as a single taxpayer with no dependents, your taxable income would be reduced to $70,400.
In 2017, the Tax Cuts and Jobs Act (TCJA) substantially increased the standard deduction. As a result, this increased the number of taxpayers who claimed the standard deduction. According to the Tax Policy Center, the 70% of tax filers who claimed the standard deduction in 2017 jumped to about 90% of tax filers in tax year 2020.
Here are some of the benefits of claiming the standard deduction:
- You can claim the standard deduction even if you have no expenses that qualify as itemized deductions.
- You don’t need to keep records of expenses.
- It’s simple, and you don’t need to educate yourself on tax laws to itemize deductions.
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Itemized Deduction
Itemized deductions allow taxpayers to subtract certain expenses from their AGI. Taxpayers often choose to itemize deductions if their allowable itemized deductions total is more than their standard deduction. Common expenses for homeowners include mortgage interest, property taxes, state and local income or sales taxes, medical and dental expenses that exceed 7.5% of your AGI and charitable donations.
To claim itemized deductions, you must list your itemized deductions on your income tax return, add them up and include the total amount. This amount is then subtracted from your income.
Some benefits of claiming itemized deductions include:
- Itemized deductions may add up more to the standard deduction.
- If you own a home, itemized deductions for mortgage interest and property taxes could easily exceed the standard deduction.
- If you’re self-employed and use part of your home exclusively for business, you may qualify to deduct part of your home expenses, like utilities.
Which One Should Homeowners Choose?
Homeowners may be able to save more money if they itemize deductions, but only if their mortgage interest is greater than the standard deduction.
According to the IRS, homeowners can deduct interest on a total of $1 million of mortgage debt for a first and second home purchased before Dec. 16, 2017. After that date, the amount was reduced to $750,000.
For example, say you purchased a home in late 2023. The loan amount is $600,000 with a 6.5% rate on a 30-year fixed-rate mortgage. Your monthly mortgage payment is about $3,792, with much of that going toward interest. Your estimated interest paid in 2024 could be as much as $38,800 — much greater than the standard deduction.
And if you purchased your home and bought points, which are upfront fees to lower the interest rate on a mortgage, these could also qualify as mortgage interest. Property taxes of up to $10,000 also qualify as an itemized deduction.
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This article originally appeared on GOBankingRates.com: Homeowners: Is a Standardized or Itemized Deduction Better To Maximize Savings?
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