15.3 Standard versus Itemized Deductions

15.3 Standard versus Itemized Deductions

REG Blueprint Area IV, Group C next asks you to identify deductions from AGI in calculating taxable income, including medical expenses, qualified residence interest, casualty losses, and taxes. Those are itemized deductions on Schedule A. They compete with the standard deduction. The taxpayer claims the greater of the two. They are not stacked.

AGI − greater of standard or itemized = taxable income before the QBI deduction. QBI is 15.4; it is not an itemized deduction and is not an adjustment to AGI.

The standard deduction exists and is indexed

Every individual who is allowed the standard deduction has a basic amount that varies by filing status (single, married filing jointly, married filing separately, head of household, qualifying surviving spouse). Additional standard-deduction amounts exist for age 65 or older and for blindness. OBBBA reset a higher statutory baseline for the basic standard deduction and then inflation-indexes from that baseline. The AICPA's REG assumption is that candidates are not tested on specific inflation-indexed dollar amounts. Do not treat a particular 2026 standard-deduction figure as the fact the exam wants. The exam will give the year's standard deduction, or it will ask you to compare a computed itemized total with "the standard deduction," or it will test who must itemize.

Taxpayers who cannot claim the standard deduction and must itemize include a married person filing separately whose spouse itemizes, most nonresident aliens, and dual-status aliens in the year of status change. Personal exemptions remain $0; OBBBA made the TCJA suspension permanent. Dependents are accounted for through filing status and credits, not through a per-person exemption.

Itemized deductions the blueprint names

Medical expenses (IRC §213). Deductible unreimbursed medical care for the taxpayer, spouse, and dependents, only to the extent the total exceeds 7.5% of AGI. The 7.5% floor is statutory and is the tested percentage. Insurance reimbursements and tax-free HSA distributions for qualified medical expenses reduce the amount that enters Schedule A. Self-employed health insurance taken as an above-the-line adjustment in 15.2 is not also an itemized medical expense.

Taxes — the SALT cap. Deductible state and local income taxes or general sales taxes (the taxpayer chooses), plus state and local real property taxes and certain personal property taxes. OBBBA raised the individual SALT cap to $40,000 for 2025 (generally $20,000 married filing separately). That higher cap is subject to a MAGI phaseout that reduces the benefit for high-income taxpayers down toward the old $10,000 floor — it does not phase the deduction to zero. The cap and the MAGI threshold increase 1% annually through 2029, then the regime reverts (back to the $10,000-style cap in 2030 under the statute as enacted). Teach that structure. Do not memorize the 2026 $40,400 arithmetic as if it were a rate table. Foreign real-property taxes are not in this SALT bucket. Pass-through entity taxes paid at the entity under a state elective PTET regime are a different design; they are not a second $40,000 of Schedule A SALT on the same dollars.

Qualified residence interest (IRC §163(h)). Itemized deduction for interest on acquisition indebtedness used to buy, build, or substantially improve a qualified residence (principal residence and one other qualified residence) that secures the debt. For acquisition debt incurred after December 15, 2017, the TCJA ceiling is $750,000 of principal ($375,000 married filing separately). OBBBA made that $750,000 cap permanent. Pre-December 16, 2017 acquisition debt can still use the grandfathered $1 million ceiling. Interest on home-equity debt is deductible only if the debt is itself acquisition indebtedness — a cash-out used to pay credit cards is not. Points paid to obtain acquisition financing are generally capitalized and amortized; REG tests the acquisition-debt idea more than a closing-statement worksheet.

Casualty losses. A personal casualty or theft loss of a nonbusiness asset is allowed only if it is attributable to a federally declared disaster (IRC §165(h)). Even then, the disaster loss is reduced by a small statutory per-casualty floor and by 10% of AGI. A business or income-producing casualty is a different §165 computation and is not routed through the personal disaster rule. A flooded basement in a year with no federal disaster declaration is not an itemized deduction.

**Charitable contributions (floor then AGI ceilings). Beginning in 2026, an itemizer deducts charitable contributions only to the extent aggregate qualifying gifts exceed 0.5% of AGI (the contribution base). That OBBBA floor is a 2026-effective IRC change and is testable on REG beginning July 1, 2026. After the floor, the familiar ceilings still apply: cash to public charities is generally limited to 60% of AGI (made permanent by OBBBA); long-term capital-gain property to public charities is generally 30% of AGI; gifts to certain private nonoperating foundations, and some capital-gain property gifts, use a 20% of AGI limit. Excess over the percentage ceilings carries forward five years. The taxpayer must itemize to use Schedule A charitable deductions. A nonitemizer instead uses the statutory §170(p) cash deduction — capped at $1,000 ($2,000 MFJ), taken in addition to the standard deduction and reducing taxable income rather than AGI (15.2) — and may not stack §170(p) with Schedule A. REG wants the floor-then-ceiling structure, not a private-foundation remainder-trust computation.

Worked scenario: SALT $18,000 plus mortgage $12,000 versus the standard deduction

Facts. Lee files single with AGI of $90,000. Qualified unreimbursed medical expenses are $4,000. State income tax plus real-property tax total $18,000. Qualified residence interest on a post-2017 acquisition mortgage is $12,000. There are no charitable contributions and no casualty. MAGI is below the SALT phaseout. The exam states Lee's standard deduction for the year rather than asking you to recite it.

Analysis.

1. Medical. 7.5% × $90,000 = $6,750. Medical expenses of $4,000 do not exceed the floor. Schedule A medical = $0.
2. SALT. $18,000 is below the OBBBA $40,000 cap, and MAGI is not in the phaseout. SALT = $18,000.
3. Mortgage interest. $12,000 of acquisition-debt interest is within the $750,000 principal cap on these facts. Mortgage interest = $12,000.
4. Itemized total = $18,000 + $12,000 = $30,000.
5. Compare. If the year's standard deduction (which the stem will give, or which is smaller than $30,000 for a typical single filer after the OBBBA baseline) is less than $30,000, Lee itemizes $30,000. If a joint filer had the same $30,000 of itemized deductions and the year's joint standard deduction were larger, that couple would take the standard deduction. The skill is the comparison, not a memorized 2026 card.

A taxpayer does not take $30,000 plus the standard deduction. A taxpayer does not lose the mortgage interest because SALT was also claimed. A taxpayer does not deduct the $4,000 of medical expenses because they failed the 7.5% floor.