One of the most impactful decisions you have to make when you're preparing your tax return can be whether you'll choose whether you want to claim the standard deduction or itemize your deductions. Both subtract from your taxable income, reducing the amount you must pay taxes on. By extension, this results in a lower federal tax bill.
But these options differ based on eligibility, complexity and other factors. Learn all about these deductions so you know when, why and how to take them.
Understanding the Standard Deduction
The standard deduction is updated annually by the Internal Revenue Service to keep pace with inflation. It requires no calculations on your part. It's a stated amount of income that you can deduct from your federally taxable income. The amount of the deduction varies according to IRS rules. Your age, dependency status, filing status and even whether you're blind all lead to different standard deduction amounts.
You can simply take the deduction amount for which you qualify, subtracting it from your adjusted gross income to get a lower taxable income on which you'll pay federal income tax. This differs from claiming a tax credit. You get to directly subtract credit from any taxes you owe.
The IRS lets most people take the standard deduction, even if they have expenses they could itemize to possibly arrive at a lower taxable income. One major exception is if you and your spouse file your taxes separately. Both of you must choose the same deduction option.
Other types of taxpayers who can't take the standard deduction include dual-status aliens, most nonresident aliens, estates, partnerships, trusts and people filing a tax return that's not for a full tax year.
Exploring Itemized Deductions
Claiming itemized deductions involves tallying up all qualifying expenses you paid during the tax year and using that total to subtract from your taxable income in lieu of the standard deduction. Qualifying expenses come with their own rules. They're not a set amount anybody. Your deduction depends on certain expenses you incurred during the tax year, and some people may have no qualified expenses at all.
All expenses are listed and totaled on Schedule A, which you must submit with your tax return. The schedule also instructs you on how to make certain calculations to make along the way. Some itemized deductions come with limits based on your adjusted gross income, and some are capped at a certain amount no matter how much you spend on the associated expenses.
Some itemized deductions were eliminated by the Tax Cuts and Jobs Act, at least while the TCJA remains in effect from 2018 through 2025. These include unreimbursed expenses for your job and some other miscellaneous expenses.
These are some of the most common expenses taxpayers can itemize in 2021, the tax return you'll file in 2022:
- Mortgage interest: You can deduct the mortgage interest expense you paid on loans up to $750,000 if entered into Dec. 15, 2017, or $1 million if you took the loan out before Dec 15, 2017. You can claim this deduction for your main or secondary home, but numerous rules apply to secondary homes so you'll want to check with a tax professional to make sure yours qualifies.
- Medical and dental expenses: You can deduct your out-of-pocket costs of medical care as long as they're qualified medical expenses according to IRS terms. The catch with this one is that you can only deduct expenses that exceed 7.5 percent of your adjusted gross income. You would need more than $2,250 in expenses if your adjusted gross income is $30,000. You won't qualify for this deduction if you don't have a pretty significant total of unreimbursed medical expenses, and it might not amount to much even if you do. You might have $2,500 in expenses, but that's just a $250 deduction based on 7.5 percent of a $30,000 AGI.
- Charitable donations: The IRS has removed charity contribution limits for 2020 and 2021 in response to the coronavirus pandemic. You can only deduct charity donations of up to 60 percent of your adjusted gross income in other years, but this increases to 100 percent in 2020 and 2021. Make sure your donations qualify based on IRS guidelines.
And here's another tax break the IRS offers in 2020 and 2021 as the nation faces down COVID-19: You can claim what's referred to as an "above the line" deduction for up to $300 in cash donations you make in 2020 and 2021, or $600 if you're married and file a separate return. You can claim this deduction and claim the standard deduction or itemize your other deductions, too.
Standard vs Itemized Deduction Amounts
You can consult the current IRS standard deduction amounts and often know right away how much you can deduct based on filing status. The standard deduction amount for single taxpayers is $12,550 for tax year 2021. It increases to $18,800 if you qualify for the head of household filing status. Married taxpayers who file separate returns can also deduct $12,550. Married couples filing jointly would deduct $25,100. You can add $1,300 to these numbers if you're blind or older than age 65.
These amounts are indexed for inflation, so they tend to increase a little annually. It's something you might want to keep in mind as you're planning out your 2022 tax year. The deduction is $12,950 for single filers and married taxpayers who file separately in 2022. Heads of household can claim a $19,400 standard deduction in 2022, and married taxpayers filing jointly get $25,900.
But the IRS offers a major exception from these amounts if someone else claims you as their dependent. You can expect a standard deduction of $1,100 in this case. The IRS will add $350 to your earned income and use this number instead if it's more than $1,100, but only up to the standard deduction amount that you would otherwise be entitled to claim.
Your deduction depends on the total of the expenses you entered on Schedule A if you itemize, as well the rules the IRS imposes on specific deductions, such as the 7.5-percent-of-AGI rule for medical expenses. It's recommended that you complete Schedule A and compare the total you arrive at to your standard deduction to determine which is more and shaves more off your taxable income.
Standard Deduction Benefits
Many taxpayers choose to take the standard deduction due to a few benefits:
- High amounts available: The standard deduction amounts were much less before the Tax Cuts and Jobs Act went into effect. A single taxpayer only got a $6,350 deduction in 2017, while a married couple filing jointly got $12,700. These amounts are almost double in the 2021 tax year. Many taxpayers are better off claiming them than itemizing.
- Broad eligibility: The estimated number of people who've chosen the standard deduction option has ranged from 70 to 90 percent, with the increase escalating when the standard deduction amounts went up after 2017.
- Simplicity: Determining your standard deduction is usually very simple if you know your tax filing status and can confirm that you don't fall into one of the ineligible categories. You can just look at the current amounts for the year and enter that deduction amount on your Form 1040. You can use the "How Much Is My Standard Deduction?" tool provided by the IRS if you have any doubts or are confused for some reason.
- Less work on your tax forms: Itemizing requires filling out Schedule A and keeping track of a good bit of documentation over the course of the tax year. Claiming the standard deduction is a lot easier whether you take a DIY approach to your tax returns or hire a preparer, because you still have to provide your preparer with information regarding what itemized deductions you spent money on, and how much.
Standard Deduction Drawbacks
There are only a few drawbacks to taking the standard deduction. Whether they impact you depends on your tax situation:
- Limited amounts: You get a guaranteed amount when you claim the standard deduction, but that's all you get. You miss out on any potential itemized deductions such as medical expenses, property taxes, state sales tax and certain charitable contributions. You'll miss out on the highest potential deduction if you fall into the group of taxpayers who've incurred far more deductible expenses than their standard deduction limit.
- Limits on eligibility: Filing separate tax returns as a married couple can create problems when your spouse itemizes and you want the standard deduction because the IRS doesn't let you mix and match. Irregular tax periods and your alien status also place limits on eligibility.
Itemized Deduction Benefits
You can get these benefits as long as your expenses qualify if you choose to itemize:
- Common expenses qualify: Whether you own a home or face large medical bills, you could benefit from reporting these costs on your Schedule A and itemizing. The category of allowed miscellaneous deductions has shrunk since the Tax Cuts and Jobs Act, but you can still deduct things like interest paid on investments and losses incurred while gambling. So it's worth checking IRS Publication 529 for more details.
- Possibly higher deduction amount: Calculating your deduction on Schedule A might yield a higher amount than your standard deduction if you itemize. Most taxpayers find the standard deduction more beneficial, but this may not be the case for you if you've faced a medical bill of tens of thousands of dollars or pay high property taxes.
Itemized Deduction Drawbacks
Be aware of these potential drawbacks if you plan to itemize:
- More work: Using this method requires completing Schedule A and listing each itemized expense. Some require complex calculations. Plus you have to hunt up your documents to back up all those expenses for the year.
- Restrictions on certain deductions: Even if you incurred a big major expense or paid a lot of interest, there's no guarantee that it will actually qualify. Some expenses have adjusted gross income limits or only allow deductions for certain property types or uses.
- Potentially lower amount: Many taxpayers just get a better return without going through the itemizing process while the TCJA higher standard deductions are available.
How to Claim the Standard Deduction
Simply enter the amount of the standard deduction you're entitled to on line 12a on the first page of your 2021 Form 1040.
How to Claim Itemized Deductions
The total of your itemized deductions from Schedule A also goes on line 12a of your Form 1040, but you must also submit the schedule as an extra form with your tax return. You might also want to take heed of line 18 of Schedule A. The IRS wants you to check a box here indicating and acknowledging that you want to proceed with itemizing your deductions even if your standard deduction would be more.
- Fidelity: The Pros and Cons of Standard vs. Itemized Tax Deductions
- IRS: Publication 501 (2021), Dependents, Standard Deduction, and Filing Information
- Tax Policy Center: What Is the Standard Deduction?
- IRS: How Much Is My Standard Deduction?
- IRS: Topic No. 551 Standard Deduction
- IRS: 2021 Schedule A Itemized Deductions
- IRS: 2021 Form 1040 U.S. Individual Income Tax Return
- IRS: Publication 529 Miscellaneous Deductions
- eFile: Medical, Dental Expenses and Tax Deductions
- IRS: Expanded Tax Benefits Help Individuals and Businesses Give to Charity in 2021
- IRS: IRS Provides Tax Inflation Adjustments for Tax Year 2021
- IRS: IRS Provides Tax Inflation Adjustments for Tax Year 2022
Ashley Donohoe has written about business and technology topics since 2010. Having a Master of Business Administration degree, bookkeeping certification and experience running a small business and doing tax returns, she is knowledgeable about the tax issues individuals and businesses face. Other places featuring her business writing include Zacks, JobHero, LoveToKnow, Bizfluent, Chron and Study.com.