What is the purpose of itemized deductions when calculating taxable income?

Itemized deductions serve the purpose of reducing taxable income, rather than reducing adjusted gross income (AGI) specifically. When taxpayers itemize deductions, they list eligible expenses they have incurred throughout the year, such as mortgage interest, state and local taxes, medical expenses, and charitable contributions, among others. This total is subtracted from the taxpayer's adjusted gross income to arrive at the taxable income.

By choosing to itemize instead of taking the standard deduction, taxpayers can potentially lower their overall tax liability if their allowable itemized expenses exceed the standard deduction amount. Therefore, the goal is to enable individuals to be taxed on a smaller amount of income, which can result in a lower tax bill. It is important for taxpayers to evaluate both the itemized deductions and the standard deduction to determine which option is more beneficial for their individual circumstances.

Other options either misrepresent the purpose of itemized deductions or focus on categories of income that do not align with how deductions are applied to taxable income.