By Eric Reed

Should you itemize your taxes?

Most taxpayers take the standard each year. The Tax Policy Center estimates that only about 10% of households itemize their taxes. This is in large part because the standard deduction is $15,000 per person for individual filers ($30,000 combined for married households). That makes it large enough that, in most cases, only the wealthiest households have enough qualified spending to exceed the standard deduction in the first place.

However, for households that do take line-item deductions, the tax benefits can be significant. In fact, a new study published by SmartAsset finds that in some states households reduce their taxable income by $50,000 to upwards of $100,000 through itemized deductions.

With tax season coming up, is this something that should be on your radar? Here’s what you should know. You can also speak to a financial advisor if you’re interested in speaking about your taxes with a professional.

What Is a Tax Deduction?

Income tax deductions are a common way of lowering your overall tax bill. With a tax deduction, you reduce your “taxable income.” This is the amount of income on which you pay taxes. By reducing taxable income, you can reduce both your tax brackets and your overall tax bill.

For example, say that you pay an effective 20% tax rate. If your income is $1,000, you would pay $200 in taxes and keep $800 in after-tax income. But, say you have a $250 deduction. This would give you $250 in non-taxable income (your deduction) and $750 in taxable income (the remainder). At a 20% tax rate, you would pay $150 in taxes and keep $800 in after-tax income. 

Deductions should not be confused with tax credits. Where a deduction reduces the income on which your bill is based, a tax credit is an adjustment to your tax bill itself. In our example, say that you have a $100 tax credit. In that case, you would have $1,000 of taxable income. You would pay 20% in taxes on that, generating a tax bill of $200. You would then reduce that bill by the $100 tax credit, giving you $100 in taxes and $900 of after-tax income. 

Some tax credits are “refundable.” This means that if the credit reduces your tax bill below $0, the government will send you a check to cover the difference. Other credits are “nonrefundable,” meaning that they cannot reduce your tax bill below $0.

Tax deductions are not refundable, meaning they cannot reduce your taxes below $0. However, most households pay taxes over the course of the year either through automatic withholding (for W-2 employees) or estimated taxes (for self-employed persons or small business owners). If a tax deduction lowers your tax bill below what you have already paid, the IRS will send you a refund for those overpayments. This does not make your deductions refundable. The IRS is just repaying money that you paid but did not owe.

The right financial advisor may be able to help you plan for available tax credits and deductions.

What Is the Standard Deduction?

The tax code offers a wide variety of tax deductions. This is one of the main ways that Congress acts to shape the broader economy, and is the largest source of anti-poverty programs. 

Everyone who files income taxes is eligible for a tax deduction known as the “standard deduction.” This is a single, flat deduction that serves as a starting point for most taxpayers. In 2025, it is set at $15,000 for individuals and $30,000 for joint households. This deduction was roughly doubled in the 2017 Tax Cuts and Jobs Act. That increase is scheduled to expire when the individual tax elements of the TCJA sunset at the end of 2025, at which point the standard deduction will drop by almost half.

The standard deduction is large enough that it reduces taxable income to $0 for many low-income households. This is what many policymakers are referring to when they talk about the large cross-section of American households that don’t pay income taxes. Many Americans don’t make enough money to pay income taxes once adjusted for the standard deduction and other low-income tax breaks.

This is one of its main purposes. The standard deduction is part of the income tax’s overall progressive design. By exempting the first $15,000 of each individuals income from taxation, this deduction reduces tax burdens for low-income households by a proportionately large amount.  

Roughly 90% of filers take the standard deduction each year.

What Are Itemized Deductions?

The IRS breaks tax deductions into two categories, known as “above the line” and “below the line” tax deductions.

Above the line tax deductions are deductions that you can claim while still also taking the standard deduction. For example, a household can deduct student loan interest payments from their taxes while also taking the standard deduction. 

Below the line tax deductions, otherwise known as “itemized” or “line-item” tax deductions, are deductions that you cannot claim while also taking the standard deduction. For all below the line tax deductions, you must choose between these deductions and the standard deduction. For example, a household cannot deduct mortgage interest payments or charitable giving while also taking the standard deduction. It’s one or the other. 

However, below the line tax deductions are not mutually incompatible. You can claim as many as you are eligible for at the same time. Nor are they incompatible with above the line deductions. The only choice you must make is whether to take the standard deduction or not.

Consider matching with a financial advisor if you have questions about your own tax strategy.

Choosing Between Itemized Deductions and the Standard Deduction

For the right households, itemized deductions can save a lot of money on your taxes. However, each year you have to choose. Do you collectively take your itemized deductions or do you claim the standard deduction? 

When filing your taxes, this is simple math. Which approach saves you the most money? If you have more than $15,000/$30,000 single/joint in below the line deductions, claim those. If you don’t, claim the standard deduction. 

When planning your taxes during the year, this is a little more complicated. Try to include the potential value of tax deductions in your financial planning and future spending. What kind of interest will you pay for your mortgage, for example? Do you have state and local taxes to deduct? Do you anticipate significant medical expenses or charitable deductions? With good planning, and good advice, you can try to consolidate spending in appropriate tax years to maximize your deductions. You can also estimate the after-tax value of different spending categories, to judge their true costs.

However, remember that itemized deductions don’t save you money overall. Except for the standard deduction, each deduction in the tax code is based on money that you spent during the previous year. A deduction reduces your taxable income by $1 for each $1 in eligible spending, which in turn reduces your final tax bill by between $0.00 and $0.37. This can have enormous value, but that math can never, ever save you more on your taxes than you spent to get the deduction. This is a very common misconception. Instead, the right way to think about itemized deductions is as an incentive program for spending you otherwise would have made.

In practice, itemized deductions are typically claimed by wealthy households. About two-thirds of all itemized tax returns are filed by households making more than $500,000 per year, with another quarter of those returns filed by households making between $100,000 and $500,000. As SmartAsset found while studying the issue, those households can save a lot of money with line-item deductions rather than the standard deduction. 

In Wyoming, for example, the average household that itemized their taxes reduced their taxable income by $122,000. Across the country, in most states, households that itemized their taxes reduced their taxable income by more than $40,000. But to get those savings, those households needed to afford the underlying spending first.

Still, no matter what your income is, it’s important to review your options. As you file your taxes, review your spending for the past year to make sure you don’t miss any potential savings. In the year ahead, make sure to consider future taxes in your financial planning. The tax code offers a lot of benefits. Make sure you don’t miss out on any of yours. A financial advisor can help you stay on top of changes in legislation. Use this free tool to match with vetted fiduciary financial advisors today.

The Bottom Line

Itemized deductions can save eligible households a lot of money. According to a recent SmartAsset study, households who itemized reduced their taxable income by more than $40,000 in one year in most states. It’s worth reviewing your finances and spending to make sure you don’t miss out on any opportunities.

Tips on Tax Planning

  • Filing and planning your taxes can be a pain, but it’s worth the time. Make sure to learn what you can deduct at tax time, so that you can know what to look out for. 
  • A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
  • Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.

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