Many taxpayers opt for the standard deduction, but sometimes itemizing your deductions is the better choice – often resulting in a lower tax bill. Whether you bought a house, refinanced your current home, or had extensive gambling losses, you may be able to take advantage of tax breaks for taxpayers who itemize. Here’s what to keep in mind:
Deducting State and Local Income, Sales, and Property Taxes
The deduction that taxpayers can claim for state and local income, sales, and property taxes is limited to a combined, total deduction of $10,000 – $5,000 if married filing separately. State and local taxes paid above this amount can’t be deducted.
Refinancing a Home
The deduction for mortgage interest is limited to interest paid on a loan secured by the taxpayer’s main home or second home. Homeowners who choose to refinance must use the loan to buy, build, or substantially improve their main home or second home, and the mortgage interest they may deduct is subject to the limits described under “buying a home” below.
Buying a Home
People who bought a new home in 2021 can only deduct mortgage interest paid on a total of $750,000 ($375,000 married filing separately) in qualifying debt for a first and second home. For existing mortgages, if the loan originated on or before December 15, 2017, taxpayers may continue to deduct interest on a total of $1 million in qualifying debt secured by first and second homes.
Donations to a qualified charity also qualify as a tax break. Taxpayers who itemize deductions can take advantage of a temporary suspension of limits on charitable contributions (CARES Act of 2020) that allows them to deduct cash donations to public charities in amounts of up to 100 percent of adjusted gross income (AGI). Normally, the limit for the deduction for cash contributions is 60% of AGI. As a reminder, the non-profit organization must be a 501(c)(3) public charity or private foundation, and non-cash donations may require a qualified appraisal. Taxpayers must have proof of all donations.
Deducting Mileage for Charity
Miles driven using a personal vehicle for charitable service activities could qualify you for a tax break. Taxpayers who itemize can deduct 14 cents per mile for charitable mileage driven in 2021, as well as 2022.
Reporting Gambling Winnings and Claiming Gambling Losses
Taxpayers who itemize can deduct gambling losses up to the amount of gambling winnings. You may deduct gambling losses; however, the amount of losses you deduct can’t be more than the amount of gambling income you report on your return. Furthermore, you must keep a record of your winnings and losses. For example, you must keep an accurate diary or similar record of your gambling winnings and losses and be able to provide receipts, tickets, statements, or other records that show the amount of both your winnings and losses.
Investment Interest Expenses
Investment interest expense is interest paid or accrued on a loan or part of a loan that is allocated to property held for taxable investments – the interest on a loan you took out to buy stock in a brokerage account, for example. Taxable investments include interest, dividends, annuities, or royalties.