Written by:
Image
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades.

Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers. While there, Paul authored and edited thousands of financial research briefs, was published on Nasdaq. com, Yahoo Finance, and dozens of other prominent media outlets, and appeared as a guest expert at prominent radio shows and i...

View all posts
Updated August 12, 2020

What is Itemized Deduction?

An itemized deduction is a reduction in taxable income that is dependent on calculations specific to the taxpayer's expenses or situation. Federal, state and local tax codes determine what is deductible and which taxpayers are eligible for itemized deductions.

How Does Itemized Deduction Work?

There are two kinds of tax deductions: standard and itemized. A standard deduction is a flat amount that applies to all qualified taxpayers. An itemized deduction requires calculations, proof of a qualifying expense, and time to fill out extra IRS forms at tax time. A taxpayer cannot claim standard deductions and itemized deductions; he must choose one.

Generally, if a taxpayer qualifies for a deduction, the taxpayer can subtract the amount of the deduction from his gross income. This in turn lowers the amount of income subject to tax. For example, if your gross income is $100,000 this year but you qualify for a $10,000 standard deduction, then you will be taxed on $100,000 - $10,000 = $90,000. If your effective tax rate is, say, 20%, then instead of paying 20% of $100,000 (i.e., $20,000) you can take the deduction and only have to pay 20% of $90,000 ($18,000). The $10,000 tax deduction saves you $2,000.

Itemized deductions often “phase out” for people with higher incomes. After all, creating, modifying, or eliminating tax deductions are one way for governments to encourage or discourage certain types of economic growth, social behavior, or activities.

Why Does Itemized Deduction Matter?

There are several kinds of tax deductions in the United States. Standard deductions are deductions taxpayers usually take advantage of if they don’t qualify for other deductions. Though taking a standard deduction is much easier and less time-consuming, when a person itemizes her deductions, she does so because she qualifies for several deductions that exceed the standard deduction. Deciding whether to itemize one’s deductions is a matter of knowing the tax rules and consulting a qualified accountant.

Ask an Expert about Itemized Deduction
At InvestingAnswers, all of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Itemized Deduction.
Be the first to ask a question

If you have a question about Itemized Deduction, then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers.

If you have a question about Itemized Deduction, then please ask Paul.

Ask a question Read more from Paul

Read this next

Paul Tracy - profile
Ask an Expert about Itemized Deduction

By submitting this form you agree with our Privacy Policy

Share
close
Don't Know a Financial Term?
Search our library of 4,000+ terms