Tax deductions — specifically itemized deductions and the standard deduction — allow you to reduce your taxable income, but they work differently.
Itemized deductions are individual, actual expenses you incurred during the year that are allowed to be subtracted from your taxable income. These are accounted for instead of the standard deduction, but only if their total amount exceeds the standard deduction.
To use this method, you must file Schedule A along with Form 1040.
Documentation and Record Keeping
If you plan to apply itemized deductions, you should keep track of eligible expenses throughout the year. Keep receipts and other documents to prove, if necessary, that these expenses meet IRS criteria.
Required documentation may include:
- Bank statements
- Receipts
- Property tax statements
- Insurance bills
- Medical bills
- Acknowledgment letters for charitable donations
What Expenses Can Be Itemized?
Generally, you can claim itemized deductions if you incurred the following expenses during the tax year:
- State and local taxes (SALT)
- Real estate taxes
- Mortgage interest
- Charitable contributions
- Uncovered medical and dental expenses (exceeding 7.5% of Adjusted Gross Income)
New OBBBA Rules for Itemized Deductions (2025)
The One Big Beautiful Bill Act (OBBBA) introduces significant new rules for itemized deductions starting in 2025.
Comparison: Before vs. After OBBBA (H.R. 1)
| Expense Type | Before OBBBA | After OBBBA (H.R. 1) | Comments |
| State and Local Taxes (SALT) | $10,000 annual limit for state and local taxes, including real estate tax. | From 2025: Limit increased to **$40,000** (2025–2029). Gradual reduction for incomes over $500,000; reduction to $10,000 for incomes > $600,000. | Limit and income threshold increase by 1% annually through 2029. |
| Real Estate Taxes | Included in SALT, $10,000 limit. | Included in new SALT limit of $40,000. | This increase allows more taxpayers to deduct more taxes. |
| Mortgage Interest | Allowed to deduct interest up to $750,000 principal debt for new loans after 2017. | Rules remain unchanged; OBBBA does not change the limit but makes it permanent for high incomes. | For existing loans, TCJA rules remain. |
| Charitable Contributions | Deductions up to 60% of AGI, no minimum threshold. | 2025: No changes. Starting 2026: Deductions possible only if amount > 0.5% AGI. For high incomes, limitation of 35% of contribution. | Reduces tax benefit for wealthiest taxpayers. |
| Medical and Dental Expenses | Expenses exceeding 7.5% AGI deductible. | Rules remain, but OBBBA allows additional consideration of some expenses that previously did not fall under limitations. | Deduction remains limited; includes only expenses not covered by insurance. |
How Itemized Deduction Is Calculated
Itemized deduction is the sum of actual expenses allowed by the tax code that can be subtracted from your Adjusted Gross Income (AGI) to reduce taxable income.
Calculation Example
Let’s consider an example of calculating itemized deductions versus the Standard Deduction.
Scenario:
- AGI: $60,000
- Mortgage Interest: $8,000
- SALT (State & Local Taxes): $10,000
- Charitable Contributions: $3,000
- Medical Expenses: $5,000
Step 1: Calculate Medical Deduction
Medical expenses are only deductible for the amount over 7.5% of AGI.
- Threshold: $60,000 × 7.5% = $4,500
- Deductible Amount: $5,000 (Expenses) – $4,500 (Threshold) = $500 is counted.
Step 2: Total Allowable Expenses
$8,000 (Mortgage) + $10,000 (SALT) + $3,000 (Charity) + $500 (Medical) = $21,500
Step 3: Compare with Standard Deduction (2025 Estimate)
- Standard Deduction (Single): ≈ $15,750
- Itemized Deduction: $21,500
Result:
$21,500 (Itemized) > $15,750 (Standard) → It is more beneficial to take the itemized deduction.
Summary Table of Calculation
| Expense Type | Amount | Note |
| Mortgage Interest | $8,000 | Fully allowable |
| State and Local Taxes | $10,000 | SALT limit is now $40,000 under OBBBA |
| Charitable Contributions | $3,000 | Fully allowable |
| Medical Expenses | $5,000 | Threshold = 7.5% AGI ($4,500) → $500 counted |
| Total | $21,500 | Itemized Deduction |
Conclusion
Itemized deductions are a way to claim your actual tax expenses to reduce taxes, but it is beneficial only when these expenses exceed the standard deduction.
The OBBBA law (H.R. 1) does not abolish the concept of itemizing expenses but updates the rules and limitations, especially for taxpayers with large incomes and specific expenses like SALT.
Note for Nonresidents: Nonresidents must apply only itemized deductions, as they are not entitled to claim the standard deduction.
How Can Gennadiy Arnautov CPA Help?
Choosing and correctly applying itemized deductions can significantly reduce your tax bill, but only with correct calculation and documentation. We will help:
- Analyze your expenses and determine whether itemized deductions are beneficial for you.
- Correctly document medical, charitable, tax, and other expenses.
- Maximize legally allowed deductions under new OBBBA rules.
- Avoid mistakes that may attract IRS attention.
Don’t leave money on the table! Competent use of itemized deductions can save hundreds or even thousands of dollars annually.
Contact Gennadiy Arnautov CPA to get maximum tax benefit.
