What are Itemized Deductions?

Instead of getting ready for my 2023 taxes, I am writing this letter. Productive procrastination, my favorite type. My house is clean, dogs are walked, meals are prepped, and I’ve found another way to procrastinate. Winning.

We’ve talked a lot about the standard deduction in a previous letter and how it helps you pay $0 in Taxes in Retirement. There is another type of deduction though, the itemized deduction.

Both deductions work to lower your taxable income. The standard deduction is a flat amount that varies based on your filing status. For 2023, the amounts are: $13,850 for single and married filing separately; $27,700 for married filing jointly; $20,800 for head of household. The standard deduction increased for 2024! You can read about those changes and more here. The standard deduction is a simple math problem. Take your adjusted gross income, subtract the standard deduction, and you get your taxable income. I am skipping a few steps, but that is the jist of it. 

Itemized deductions are a list of qualified expenses that you can use to lower your taxable income. If the total value of expenses exceeds the standard deduction, you should itemize. If you don’t have enough itemized expenses, you should use the standard deduction. It’s all about picking the option that’ll save you the most in taxes.

Itemized deductions are essentially personal write offs. I plan to write off my $1,365 in Yankee Candle purchases this year as “business expenses” since I talk about them all the time in this letter. I get the feeling the IRS is going to be a bit like Johnny Rose though. 

So what are the expenses you can use to itemize?

• Home Mortgage Interest

• Certain Taxes

• Medical and Dental Expenses

• Casualty and Theft Losses (in federally declared disaster areas)

• Charitable Gifts

• Other Miscellaneous Items  

For most people, the biggest determiner of standard or itemized deduction is homeownership. If you don’t own your home, the standard deduction probably exceeds what you could itemize. If you do own your home but the mortgage interest you’ve paid is relatively small, you’ll still probably be better off with the standard deduction.

Mortgage Interest:

You can write off any mortgage interest you paid on the first $750,000 of debt with certain exceptions. IRS Publication 936 goes into specifics, but the simplest answer is you can write off all the interest on Form 1098 that your mortgage company sends you each year. If you have multiple homes and investment properties, you can write them all off as long as the properties are in your name. Once you go beyond $750,000 in debt, you can no longer write off the interest paid. The limit goes up to $1 Million on debt incurred before December 16th, 2017. What happened on that day? I have no idea. It’s not the end of the fiscal year or calendar year. It’s just some random Saturday. It’s also oddly the day before Mike got married, maybe they’re related…

Certain Taxes:

You can deduct up to $10,000 in state and local taxes paid. Sadly, you cannot deduct federal income tax paid. You can deduct personal property taxes though which makes your escrow payments hurt a little less. 

Medical and Dental Expenses:

You can deduct unreimbursed expenses that exceed 7.5% of your adjusted gross income. You can deduct expenses for yourself, spouse, or dependent. 

Casualty and Theft Losses:

I hope no one ever has to use this deduction for two reasons. 1. That means you went through some horrible event that led to a federally declared disaster. 2. The IRS’s advice to you is “Taxpayers with deductible casualty and theft losses should be referred to a professional tax preparer.” So not only did you just go through a hurricane or tornado, but now you need to talk to a boring accountant?? Insult to injury. 

Charitable Gifts:

This is where it gets funny. Any donations to qualified charitable organizations are deductible. You know what you specifically cannot deduct contributions to? Communist Organizations. That means someone must have tried because otherwise it wouldn’t be specifically listed. 

You can deduct monetary donations, the value of clothes donated, and even the cost of driving to and from the charity. You know what you specifically cannot deduct? Blood donations. I can see why that makes sense. If the IRS puts a value on a pint of blood donated that would probably fuel the black market blood scene.

Miscellaneous Items:

There are two main ones: work related expenses for disabled individuals that enable them to work and gambling losses. Two widely different deductions. You can only deduct gambling losses to the extent of winnings, meaning you can only deduct losses if you have equivalent winnings reported. This is a forcing function to have gamblers report winnings. If your losses exceed your winnings (like most gamblers), you cannot deduct those additional losses. 

The Tax Cut and Jobs Act eliminated the itemized deduction limitations. This removed the income caps and maximum deductions that were in place up until 2017. That change makes the itemized deductions even more appealing. 

The best news about all of this is that most tax softwares automatically ask the necessary questions to determine which deduction makes the most sense for you. If you use an accountant, they will certainly guide you through the best choice. If they don’t, you now have a base of knowledge to ask the right questions. 

Call to Action

As you begin to collect all your necessary tax documents, record all your potential deductions to help speed the process when you do file your taxes.

What We’re Reading/Listening To:

In preparation for the Super Bowl, I am listening to exclusively Taylor Swift music this week. Don’t worry, only Taylor’s Version.

Debrief on Deck

Next week, Mike is going to talk about infinite banking. This is not the same as being the banker in Monopoly and always suspiciously having the exact amount of money to buy the next property.

As always, please reach out to us with any questions or comments you have. You can reply directly to this email or find us on social media (X (formerly Twitter) and Instagram).

Until then, stay the course.

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