EXPLAINED: Itemized vs Standard deduction - 2025 version

A lot of confusion popped up due to the "SALT deduction" increase in Trump's One Big Beautiful Bill Act (OBBBA). I wrote a separate post specifically about SALT. This post below is a prequel that explains the basic concept of Itemized deductions.

1. This is all about personal deductions, NOT business deductions!

Your business deductions are always "itemized" in the sense that you have to add up your expenses and group them by categories. And your business deductions are always allowed.

You may want to yell - not always, my rental deductions such as depreciation are NOT allowed!!! Wait, let's clarify this. Your business deductions, as I said, are always allowed. However, if deductions for your rental properties are more than your rental income - yes, indeed, your resulting losses may be limited. However, they are not lost or wasted, they are simply pushed into the future years.

In contrast to business deductions, your personal deductions often do get wasted or lost. This is where Itemized deductions compete against Standard deductions.

So let's be 100% clear. Property taxes and mortgages on your rental properties are business deductions which are always fully allowed. Nothing changed here. However, property taxes and mortgages on your own home are personal deductions. SALT and Big Beautiful Bill do matter for personal itemized deductions.

2. AGI - Adjusted Gross Income.

We start by figuring out your total personal income: your W2 job wages, your interest and dividends, your capital gains, your retirement distributions and so on.

We then add your business and rental net income. Net income means income after subtracting deductions. If you're a Realtor, your net business income is your commissions minus all deductions such as marketing, driving, technology, fees and so on.

If you're a landlord, your net business income is your rent minus all deductions such as mortgage interest, property taxes, insurance, maintenance, depreciation and so on. At the end of the year, you may have a net business loss rather than income. For a Realtor it means a bad year. For a landlord it often means smart tax planning.

Now we combine your personal income and your net business income (or loss) - and we have your AGI - Adjusted Gross Income. Of course, more things go into AGI calculation, this was merely a very brief introduction.

AGI is the number that matters when you qualify for a loan or financial benefits, by the way.

3. How personal deductions affect your taxes.

Your taxes are not applied to your AGI. They are applied to your taxable income - which is your AGI minus your personal deductions.

Let's take a quick example:
- Your W2 was $100k. But you are not paying taxes on $100k.
- You also had a rental property that showed a $10k net loss after depreciation.
- Your AGI is $90k ($100k - $10k). But you are not paying taxes on $90k.
- Your personal deductions are $30k.
- Your taxable income is $60k ($90k - $30k).
- $60k is what you are paying taxes on.
- Not on your $100k W2, not on your $90k AGI, only on $60k.

I hope this is very clear: the more personal deductions you have, the less taxes you pay.

4. A no-questions-asked gift: Standard deduction.

You can always take a standard deduction (with some rare exceptions). This standard deduction does not require any receipts, any proof, any tax forms. You just take it. It is as easy as it sounds.

How much is it? Standard deduction was temporarily doubled by the first Trump tax reform in 2018, and the 2025 law made those double amounts permanent, yay!

Single people can take about $15k as a standard deduction, and married couples can deduct about $30k. The exact amounts (slightly increased by OBBBA) will be automatically applied by your tax software.

5. Can you top this? Itemized deductions may be a better alternative.

Itemized deductions throw a challenge your way. Can you beat the fairly generous standard deduction by listing all allowable deductions line-by-line aka itemizing? If the total of your itemized deductions is greater than the standard deduction, you can deduct the bigger of the two numbers.

Important to remember: it's either-or, not both. You add up all your itemized deductions. If the result is higher than the standard deduction - you win, you take the bigger number. If the result is below the standard deduction, you stay with the standard. Either way, you take the bigger of the two numbers. You don't dip below the standard deduction.

Should you bother itemizing? If you manage to top the standard deduction - sure, your efforts pay off. And if not? Well, then you simply wasted some time, that's all. We waste plenty of time anyway. I do.

Another important thing to remember: you can freely switch between standard deduction one year and itemized deductions next year, and then back to standard if it works in your favor. There are no restrictions on such back-and-forth, unlike the tax rules around mileage allowance for driving.

6. So, what counts as itemized deductions?

The list is long, and each item on the list comes with its own rules and small print. Here are the four most common itemized deductions:

State or local sales taxes. If you live in a state with state income tax, such as California or New York, you can count the income tax you paid to your state for last year. In income-tax-free states, such as Texas and Florida, you can instead count sales tax on your last year's purchases.

Property tax on your home. Remember, this is tax on your personal residence only, not on your investment properties. Your second home counts, too, if you have it.

Mortgage interest on your home. Again, we are only counting your personal residence (or two) here, not your investment properties.

Charitable donations. Caution: only donations to qualified charitable and non-profit organizations count here, and documentation is required if the IRS gets suspicious whether you're inflating your good deeds.

I will repeat that this is only a partial list, and every item has its own restrictions.

Now it is number crunching time. Add up the four items listed above. If you're coming close to the standard deduction, then a more thorough job is needed to maximize your benefit. If you're way below the standard deduction, then just take the giveaway standard and call it a day.

7. SALT

The first two of the four main itemized deductions - state/local taxes and property taxes - add up to what is known as SALT.

Before 2025, the tax law limited SALT to $10,000. Anything above $10,000 was wasted as far as tax benefits go. If you paid high income taxes to your state or high property taxes to your local tax assessor or both - then you likely ran into this limitation. It was very annoying, to put it mildly.

The Big Beautiful Bill changed that $10,000 SALT limit to a far more reasonable $40,000 number. Predictably, with some restrictions and only temporarily. See my separate post about SALT and OBBBA.

8. The Big Ugly Lie dispensed by Realtors and lenders.

For obvious reasons, Realtors and lenders want to use tax benefits as selling points. They love to say: your property taxes and mortgage interest are tax-deductible!

This sounds great and is technically correct. Except that, practically speaking, taxes and mortgage interest being tax-deductible usually does not save you anything. Especially not before 2025.

How so? Well, let's take an example.

- $5,000 state income tax
- $10,000 property tax on your home
- $15,000 mortgage interest on your home
- $3,000 donations to your alma mater

Under the old SALT rules, the first two numbers together were capped at $10,000, even though the total was $15,000. Given this pre-2025 cutoff, we have:

     $10,000 + $15,000 + $3,000 = $28,000.

Considering that the standard deduction for a couple is $30k, we have absolutely zero benefit from itemizing. In other words, owning our home saved us absolutely nothing on taxes. Ouch!

But Trump just quadrupled SALT! True. Let's redo our math under 2025 OBBBA rules.

     $5,000 + $10,000 + $15,000 + $3,000 = $33,000.

Aha! Now we win! Well, kind of. We exceeded the 2025 $31k standard deduction by a whooping $2k! Yes, it does save us a couple hundred dollars. But it's not much of a monetary reward for paying $10k in property taxes and $30k in mortgage payments. Nice try, gentlemen.

I'm not against home ownership, not at all. I own my home. But not because of the tax benefits.

9. State income tax quirks.

Every state with a state-level income tax has its own set of tax laws. Maddeningly, most of those states chose to be non-conforming. What it means is that they say: we do not care what the IRS does for Federal taxes. For our state taxes, we are going to do it differently.

And, to make things more fun (for state legislators) and more aggravating (for the rest of us), each state does not conform in its own random way.

Guess what? If you live in a state with state income tax, you need to understand your state's rules. Super annoying, I know.

State-specific treatment of itemized deductions is way outside the scope of this post. Besides, it is a moving target, because states are going to react to OBBBA in their own ways. As always, they will choose different paths, so have fun figuring out what your state is going to do now.

The only advice I can give you here is to work with a tax professional who is very familiar with your state's unique tax rules and keeps on top of the most recent state-level changes.

Or move to one of the states that does not have state income tax, like Texas or Florida. Then you won't need to worry about state tax rules, not to mention paying taxes to your state.

10. Are there other tax planning opportunities around itemized deductions?

I'm glad you asked. Of course there are, and now with OBBBA more so than before. Find yourself a good tax accountant. Here is how to find one. We would love to help you.