Lots of people think they're getting a tax benefit for gifts to charity or their mortgage interest, but here's the thing:
Most aren't.
Things like charitable gifts and mortgage interest are itemized deductions.
This means that, for most people, these expenses don’t have any impact on their federal tax return because that take the standard deduction instead of itemizing.
So, what’s the difference?
Well, when you do your taxes, you get to either subtract the standard deduction OR your total itemized deductions from your income to calculate your taxable income. Whichever is higher is what you get to use.
In 2024, the standard deduction is $14,600 for single people, $29,200 if you're married and file a joint return, and $21,200 if you file as Head of Household (this is most common for single parents).
There are other things that can adjust your standard deduction - for instance, if you're over 65 or blind - but most people will use the numbers above.
Bottom line: If your total itemized deductions are below the standard deduction amount for your filing status, you’re going to be using the standard deduction because it's more beneficial.
But what are itemized deductions?
The most common itemized deductions are:
State and Local Taxes (SALT),
Medical Expenses,
Mortgage Interest, and
Charitable Giving.
I know it already seems like a lot to keep track of, but to make matters worse, they all have their own rules.
Don’t worry, I’ll lay them out for you.
State and Local Taxes (SALT)
These include property taxes on your home, income taxes paid to state and local governments, and even things like vehicle registration or sales tax (if you can keep track of all the sales tax you pay in a given year).
But here’s the catch - you can only include up to $10k of these taxes in your calculation for itemized deductions, no matter your filing status.
That means that if your property taxes are $6k and you paid $5k in state income taxes, you don’t get to add that $11k to the itemized deduction calculation - you’re going to be capped at $10k.
Medical Expenses
Did you have a hefty medical bill this year? Keep track of it because it might just save you some money on taxes.
HOWEVER - you don't get to include in this deduction any expenses that were reimbursed from or paid out of an HSA or FSA, so keep that in mind while reading this next section.
The medical expense deduction is subject to a floor of 7.5% of your modified adjusted gross income (MAGI). MAGI is usually pretty close to your actual income, but you should probably check with a professional to be sure.
So what does the floor mean?
If MAGI is $100,000, then the first $7,500 of medical expenses can’t be included in your itemized deductions.
Let’s say you have $17,000 of medical expenses in 2024 and $100,000 of income. After factoring in the 7.5% floor, you can add $9,500 to your itemized deductions.
Mortgage Interest
With higher interest rates, it’s more likely that new homebuyers are going to be using this deduction than ever before.
Not all mortgage interest can be deducted, but the interest from mortgages up to a total of $750k that were used to purchase or improve your primary and/or second home can be.
Yes, you read that right - it’s not just your primary home that you can deduct the mortgage interest on, but also that lake house you’ve been keeping your eye on.
So if you have a $300k mortgage that you paid $15k in interest on, it’s more than likely that you can add that dollar amount to your itemized deductions.
Charitable giving
Gifts to charity are great, but gifts to charity with tax benefits are even better!
As long as you’re giving to a qualified charities (like religious organizations, or most nonprofits), you can usually add most of your contribution to your itemized deductions.
There are some limits based on the type of gift you give and to what type of charity your donating, and how much you can deduct in any given year will be limited by your total income.
For instance, if you give cash directly to your church, you can deduct up to the lesser of the amount of the gift or 60% of your income.
Example
John and Jane are both under the age of 65, file as married filing joint, and in 2024, they will make $150,000 of income.
They'll pay $5,000 in property taxes and $7,000 in state income taxes.
They have total unreimbursed medical expenses of $8,000.
They will pay $15,000 in mortgage interest on their $400,000 mortgage.
And they gave $5,000 to their church.
The state and local taxes that they can include in their itemized deductions are limited to $10,000 (even though they paid $12,000).
SALT: $10,000
They won't get to deduct ANY of their medical expenses because the expenses didn't exceed 7.5% of their income (7.5% of $150,000 is $11,250).
Medical Expenses: $0
They can include all of their mortgage interest because the value of the mortgage is under $750,000.
Mortgage Interest: $15,000
And they can include their gifts to the church.
Charitable giving: $5,000
Total itemized deductions: $30,000
Standard deduction: $29,200
Hooray! They're get to itemize!
But wait a second - itemizing only gives them an additional $800 deduction. If they're in the 22% tax bracket, that comes out to $176. Almost seems like it should've been better, right?
Conclusion
Part of the tax planning that I do for the people I work with includes maximizing itemized deductions with strategies like bunching charitable contributions or maybe even changing when you pay your property tax bill.
If you want to review your return with a professional who can point out ways to save money on taxes, head on over to my Contact page to get in touch.
As always, keep in mind that you don't have to go it alone. I’m Austin Preece, a financial planner in Eau Claire, Wisconsin, and I work virtually with people across the US. Check out my website to see what it's like to work with me and reach out if you have any questions.
If you found this post helpful, help spread the word! Share with friends and family that you think may benefit as well. But remember, this is solely for educational purposes - it's not advice.
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