It doesn't matter whether you're a business owner or an employee: you probably want to keep your income tax bill as low as possible. Each year, you must choose whether to take the standard deduction or itemize deductions on your federal income tax return. Most taxpayers claim the standard deduction, which is predetermined by the IRS each year.
What is the Standard Deduction?
In general, the standard deduction refers to the amount taxpayers can deduct from their income if they do not separate, or itemize, deductions for mortgage interest, charitable contributions, state and local taxes, and other items separately.
Standard deductions are fixed dollar amounts that taxpayers can use to reduce their taxable income. It is up to them whether to claim the standard deduction or itemize deductions. If a taxpayer does not itemize their deductions, they can still claim the standard deduction. Additionally, it eliminates the need for itemizing and reduces the need to keep expense receipts.
You can utilize the standard deduction to reduce your tax bill by taking the portion of your income that is not subject to tax. Standard deduction amounts are determined by your filing status, your age, and whether you're disabled or claimed as a dependent on another's return.
How much is the Standard Deduction?
Standard deductions reduce taxable income by a set amount. Several factors determine the standard deduction amount - income, age, filing status, whether or not the taxpayer is blind, and whether or not the taxpayer is married or a qualified widow(er).
Helpful Resource: How to Choose the Right Filing Status
As a result of the Tax Cuts and Jobs Act at the end of 2017, standard deduction amounts nearly doubled. This increase is scheduled to end in 2025.
Some states and the federal income tax system offer higher standard deductions for the elderly and the blind. If you are 65 or older and single or blind, you can claim an additional deduction. Individuals claiming themselves as dependents cannot have deductions exceeding certain amount of dollars plus their earned income. A disaster loss can also increase your standard deduction, but the loss must be in an area declared a disaster by the government.
How the Standard Deduction Works
To reduce your federal tax bill, you can use the standard deduction to lower your taxable income. Every year, the IRS adjusts the standard deduction in accordance with inflation. Based on your filing status, age, and whether you are blind, you can deduct a certain amount.
The exact dollar amount you take as a standard deduction is deducted from your gross income. After that, your tax rate is applied (along with any tax credits and other factors) to calculate your total tax owed. By reducing your AGI enough, a portion of your taxable income may fall into a lower tax bracket, saving you more on taxes.
Few Things to Remember:
- The standard deduction is based on the tax year, not the tax year in which you file.
- You can take the standard deduction even if you don't qualify for any other deductions or tax credits. You pay less tax on your income when you use the standard deduction.
- If you itemize, you cannot take the standard deduction and itemize at the same time.
- If you take the standard deduction, you cannot deduct home mortgage interest or many other popular tax deductions - medical expenses or charitable donations, for example.
Special Adjustments for Standard Deductions
A taxpayer's overall standard deduction can be adjusted somewhat according to their filing status, and other rules determine whether or not they may claim it.
The Standard Deduction Based on Age or Blindness
An additional standard deduction is available to the elderly and the blind. The taxpayer's standard deduction is added to an additional amount based on their filing status.
Special Rule for Married Couples
If you and your spouse are married but filing separate returns, you must both take the standard deduction, or you must both itemize your deductions. It is not possible for one spouse to itemize and the other to take the standard deduction.
It's a good idea to figure your taxes both ways, with each spouse itemizing and each spouse taking the standard deduction, to see which yields the biggest tax savings overall.
Helpful Resource: Should Married Couples File Jointly or Separately?
Standard Deduction for Dependents
Those who can be claimed as dependents on another person's tax return have variable standard deduction amounts. Their standard deduction will be limited to either $1,100 or their earned income plus $350, whichever is greater. No matter what filing status they have, the deduction is limited to the standard deduction based on their filing status. The limit has remained the same since 2019.
Standard Deduction vs. Itemized Deductions
There are two ways to claim tax deductions - the standard deduction or itemized deduction. The choice is yours, but you cannot use both.
You can use the itemized deduction option to list all your deductible expenses for the year, such as:
- Property taxes
- Medical expenses
- Charitable donations
- Gambling losses
- Other expenses that make up your tax liability
In general, taxpayers prefer the standard deduction over itemized deductions because they don't have to keep track of every possible qualifying expense during the year. Also, a number of people may find that the standard deduction amount exceeds their total tax-deductible expenses if they added them all up separately.
When to Claim the Standard Deduction
It makes sense to claim the standard deduction if it saves you more money on taxes than itemized deductions. To determine which deduction you should claim, you must first calculate your itemized deduction.
It is possible to itemize your deductions in place of the standard deduction. Your taxable income can be reduced by the actual amount of certain expenses, up to certain IRS limits. Mortgage interest, some home equity loan interest, charitable contributions, and eligible medical expenses are all common itemized deductions. One of the biggest itemized deductions for many taxpayers is the state and local tax (SALT) deduction.
To figure out your itemized deductions, you must file a Form 1040 Schedule A. In case of an audit by the IRS, make sure to keep records of the items you deducted. If you itemize deductions on your tax return, the total amount of your itemized deductions must exceed the standard deduction for your filing status. If not, it makes more financial sense to claim the standard deduction. Plus, you handle fewer documents and paperwork.
Helpful Resource: What Is an IRS 1040 Form?
Deciding How to Claim Your Deductions
When you are unsure about whether you should itemize deductions or take the standard deduction, run the numbers. The deduction that offers you the greatest benefit is the one you should probably take.
If you haven't tracked your expenses throughout the year, taking the standard deduction is definitely easier. The standard deduction is usually chosen by the majority of Americans, and you can use that even if you don't have a single expense you could deduct. Due to the 2017 Tax Cuts and Jobs Act, the standard deduction has also become even more attractive after it increased in size dramatically, while some itemized deductions were eliminated or reduced.
You may want to consult a financial advisor who specializes in taxes if you want to itemize but need assistance. Tax professionals and tax software can help you file your annual taxes, but a financial advisor can help you optimize your tax strategy.
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