If you're tuned in, tax time is really "deductions" time. Tax deductions ensure that you don't have to pay more in taxes than the tax code requires. Each deduction effectively reduces your taxable income for the year. Let's cover some specific deductions for your 2020 taxes.
What Can You Deduct on Your 2020 Taxes?
Not every taxpayer qualifies for every deduction. The goal when doing your taxes is to identify the deductions that apply based on your debts, family status, job description and assets. We've seen the way that deductions are handled change significantly with the introduction of new tax laws in 2018.
For 2020, you have a major choice to make. You can choose to either take the standard deduction or itemize your deductions.
Read More: A List of Items That Can Be Claimed on Income Taxes
What Is the Standard Deduction for 2020 Taxes?
If you choose to take the standard deduction, you won't be able to take itemized deductions. When doing this, you're agreeing to reduce your tax burden by a "flat" amount. Here's a look at the standard deductions for 2020 and 2021:
- Single: $12,400 (2020), $12,550 (2021)
- Married, Filing Jointly: $24,800 (2020), $25,100 (2021)
- Married, Filing Separately: $12,400 (2020), $12,550 (2021)
- Head of Household: $18,650 (2020), $18,800 (2021)
Taxpayers over the age of 65 get bigger standard deductions. Add $1,650 to your deduction total if you're filing as single or head of household as a person over the age of 65. Those filing jointly over the age of 65 can add an extra $1,300 in deductions. That's $2,600 more if both spouses happen to be over the age of 65.
Does it ever make sense to choose itemized deductions over the standard deduction? Yes, this is a better choice for some taxpayers who are in a position to take advantage of multiple large deductions. Ultimately, your total itemized deductions would need to add up to more than your standard deduction in order for this option to make sense. Here's a rundown of the common itemized deductions to consider using on your 2020 taxes:
- Student loan interest
- Tuition and fees
- Moving expenses for military members
- Performing-arts business expenses
- Self-employed retirement savings
- Insurance premiums for self-employed taxpayers
- Loan interest for investment properties
- Losses from a federally declared disaster
- CD withdrawal penalties
- 50 percent of self-employment taxes
- Charitable donations
- Mortgage interest
- Gambling losses
- IRA contributions
- HSA contributions
- Home office
- Educator expenses
Keep in mind that you're choosing a time-consuming option over the "automatic" option of the standard deduction when you choose to itemize your deductions. You'll also need to be able to back up your claims with proof of your deductions from the 2020 tax year. That bit of effort will be more than worth your while if you're able to reduce your taxable income by a bigger amount than what the 2020 standard deduction can deliver.
Make sure to compare 2020's standard deduction to your 2020 itemized deductions before making the decision. The standard deduction trickles upward each year. That means that your itemized path might not be the winner this time around just because it was the best option last year.
Final Thoughts on Taking 2020 Deductions
For most people, the standard deduction makes sense in 2020. If you happen to own a business that qualifies you for bigger deductions, it makes sense to use the itemized route if that will reduce your income by a greater amount. Just keep in mind that you cannot use both the standard deduction and your list of itemized deductions when you file your 2020 taxes.
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.