#26 | Should I Take the Standard Deduction or Itemize?

Jon “Jag” Gay: Welcome to the Protecting & Preserving Wealth Podcast with your host, Bruce Hosler. I am Jon “Jag” Gay. Bruce, good to be with you as always.

Bruce Hosler: Jon, it’s great to be with you again.

Jon: Today we’re talking about the standard deduction versus the itemized deduction. I know this is a question that comes up a lot with your clients and folks in my life too. The first comment I bet a lot of our listeners would like to understand is, what should they be doing about standard deduction? Should they take that, or is there a better choice?

Bruce: That’s a great question, and the answer depends on the taxpayer’s individual situation each and every year. Perhaps one year they will benefit from taking the standard deduction and the very next year, depending on their income, the amounts of income, the sources of income, it may make a big difference to file a Schedule A and itemize their deductions if they can.

Jon: Well, that leads to the obvious question, Bruce, most of our listeners are going to have. How do I know when I should take the standard deduction versus when I should track everything and itemize the deductions?

Bruce: Jon, these are easy to answer, but it depends on how close you are with your other itemized deductions to the total amount of the standard deduction. Let me illustrate. There are really only about six areas that you can take an itemized deduction on since the Tax Cuts and Jobs Act of 2017. Let’s consider them individually.

First, medical and dental expenses. This will usually include all your medical and dental expenses that you’re required to pay out of pocket, including your medical insurance premiums. The catch is only those medical expenses that exceed a 7.5% of your current adjusted gross income, AGI, will be able to be deducted. To illustrate, let’s say a married couple, your AGI in 2023 is $100,000. You would have to pay more than $7,500 of medical expenses out of your pocket before you would even be able to deduct $1 of medical expenses for this year.

Jon: I think about my parents in the last year as well. That sounds like many people are going to find it really hard to qualify for those deductible medical expenses, or for any of them really.

Bruce: That’s exactly right, and that’s what I’m trying to point out. Unless you have a big surgery or some big operation, then for 2023, the standard deduction for a couple filing- married filing joint, the standard deduction is $27,700. If they happen to be over the age of 65 or blind, they receive an additional $1,500 for a total standard deduction of $29,200 for 2023.

Jon: Well, Bruce, that makes me ask what the other available itemized deductions are.

Bruce: Well, since the Tax Cuts and Jobs Act of 2017, the potential itemized deductions have been limited severely. Let me share the big ones that are still available. First, we have the SALT limitation. SALT stands for state and local tax. It is a limitation of just $10,000 per year for single filers, joint filers, or for heads of households. That includes any taxes you pay for state income taxes, plus your property taxes on all your properties, and any sales tax you might pay for buying an RV or a car or anything like that. All those taxes are limited to just $10,000 per year.

Jon: I have heard of this in the news. No wonder people are all worked up about this. I’m sure a lot of our listeners had counted on that state tax deduction for years. Now, like you said, it’s limited to just $10,000.

Bruce: That’s right, and now the SALT tax limitation will be in place until the Tax Cuts and Jobs Act sunsets in 2025. Unless the government decides to do something about that and extend the tax laws, this limitation will sunset as well.

Jon: Good to know. What are the other itemized deductions that our listeners can use, Bruce?

Bruce: Certainly, the mortgage interest deduction is very attractive to many taxpayers. The mortgage interest on your home can be itemized and potentially qualify as an itemized deduction if you meet the rules. Primarily, the debt has to be acquisition indebtedness. That means you must have used the loan to buy the house or improve the house. Using borrowed funds for other purposes, not improving the house or buying the house, does not qualify, like paying off a credit card.

Jon: Got it.

Bruce: The second requirement is that the loan must be secured against the property. If you borrow money and use some other collateral to establish a loan, like, let’s say, collateralize it with something else, maybe your security is in an account or something like that, then that loan would not qualify for mortgage interest deduction.

Jon: How many homes, Bruce, can a person purchase and write off the interest as an itemized deduction?

Bruce: As the tax laws are right now, only two, that means a primary home and a secondary home. A rental home, we would write off the interest of the loan on the rental property tax form, so it doesn’t matter there.

Jon: Okay. Now, mortgage interest can be a big deduction. Are there any others that can be big?

Bruce: The big one, really, it’s charitable donations, and they can potentially be very large as an itemized deduction. Some people pay tithing to their church or have an annual financial commitment to the charity of their choice, say like a college alma mater, where they give to annually. For our listeners who make annual charitable donations, they may be some of our best candidates to qualify for itemized deductions.

Jon: I’m sure a lot of our listeners, Bruce, do give charitably, but perhaps not in large sums, big enough to increase their standard deduction, especially with the higher current standard deduction amounts. How do people know if they should go through all this work to try to itemize?

Bruce: Jon, this is the main question I get, and I wanted to address it in this podcast. First, I want to remind all of our listeners that if you are a resident of Arizona, your medical expenses are 100% tax deductible to the state of Arizona. No matter if you itemize or not, if you’re an Arizona resident, you will want to capture all of your medical and dental costs and turn that in for a deduction. Now, after that, the best place to start is to look at last year’s tax return for 2022. Did you itemize or did you take the standard deduction?

Jon: How can they tell that looking at the tax return? What are the things to look for?

Bruce: They’re looking to see if they have a form titled Schedule A, itemized deductions on the return. If they don’t, they will be able to see the standard deduction amount or the itemized amount on line 12, line 12, folks, of your 2022 Form 1040.

Jon: If they used the standard deduction, how will they know how close they came to being able to itemize?

Bruce: Jon, that requires that they add up all of their potential itemized deductions amount to see if they exceeded the standard deduction.

Jon: Bruce, from what you’re saying, it sounds like there might be two groups of taxpayers, those that are not likely to ever be close to having enough itemized deductions, so they just plan on claiming the standard deduction each year, and then you have those that might be close some years, might potentially benefit from providing their tax professional with all the itemized expenses, see if they could qualify for that bigger itemized deduction.

Bruce: That is exactly what I’m trying to address with this podcast, Jon. I don’t want people to stress and worry about gathering a bunch of expenses if it will never benefit them. Some people have paid off their home, won’t have any mortgage interest deductions for this year or any year. With the SALT limitation, many of them will never be able to itemize. Just settling for the new standard deduction is a less stressful way for them to go.

Jon: Could very much be the case. What about people who still have a mortgage, Bruce?

Bruce: These are likely people who may potentially benefit from itemizing their tax deductions. The other trigger that I want to plant in our listeners’ minds are the two other key deductions that can make all the difference. If you have big medical bills for one year, you need to see if you will benefit from itemizing. The same goes for a year in which you have a big charitable donation. Perhaps you’ve made a large charitable donation one year. That is a year you need to plan on trying to itemize.

Jon: I think like so many things we’ve talked about in this podcast, Bruce, it really does come down to individual circumstances and talking to a professional that can really help you crunch these numbers and figure it out. If any of our listeners have more questions or want to speak to you and your team at Hosler Wealth Management, how do they best find you?

Bruce: Jon, they can reach us best on the website at hoslerwm https://hoslerwm.com or in Prescott, (928) 778-7666 or in Scottsdale, (480) 994-7342.

Jon: Bruce, I’m going to head upstairs and look at my last year’s tax returns with this newfound knowledge and will talk to you in a couple weeks.

Bruce: All right. Thanks, Jon.

Jon: Securities and advisory services offered through Commonwealth Financial Network, member of FINRA/SIPC, a registered investment advisor. Forward-looking commentary should not be misconstrued as investment or financial advice. The advisor associated with this podcast is not monitored for comments and any comments should be given directly to the office at the contact information specified.

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