Along with providing a lot of financial information when you prepare your tax return, you'll choose whether you want to take the standard deduction or determine your itemized deductions. Subtracted from your adjusted gross income, both types of deductions help you get a smaller taxable income and smaller federal tax bill, but they differ based on eligibility, complexity and potential amounts along with other factors. Learn all about these deductions so that you know when, why and how to take them.
Understanding the Standard Deduction
Updated annually by the Internal Revenue Service, the standard deduction requires little to no calculation on your part, as you get a stated amount of income to deduct from your federally taxable income. The amount of the deduction varies according to IRS rules. For example, your age, dependency status, filing status and even whether you're blind, leads to different standard deduction amounts.
You can simply take the deduction amount for which you qualify, subtract it from your adjusted gross income and then get a lower taxable income for which you'll pay federal income tax. Keep in mind that this differs from a tax credit in which you get to subtract an amount from your taxes due. As is the same with itemized deductions, your Social Security and Medicare taxes (also called FICA taxes) see no decrease once the calculation's done.
The IRS lets most people take the standard deduction, even if they have expenses they could itemize and possibly get a lower taxable income that way. One major exception is if you and your spouse file your taxes separately since both of you will need to choose the same deduction option. Some other types of taxpayers who can't take this 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
Itemized deductions differ from the standard deduction in that you report qualified expenses and can get a reduction in your adjusted gross income according to the rules and allowances for each specific expense. This means there's not a set amount anybody gets, as it depends on certain expenses you incurred during the tax year, and some people may have no qualified expenses at all. All expenses get listed on your Schedule A, which also instructs you on calculations to make along the way.
The IRS has guides covering many categories of expenses that you could itemize along with details like any limits based on adjusted gross income or expense amount. Prior to the Tax Cuts and Jobs Act, these included unreimbursed expenses for your job alongside many other miscellaneous expenses, but now the allowed deductions are primarily for personal expenses.
Here are just a few of the most common expenses taxpayers may itemize in 2020:
- Mortgage interest: Depending on when you bought your home, you could deduct the mortgage interest expense paid for either the first $750,000 (after December 15, 2017) or the first $1 million (before Dec 15, 2017) of your house. It can work for a main or secondary home, but the IRS has further rules you'll need to check.
- Medical and dental expenses: Whether you've had a procedure, bought medical equipment or needed medication, you could possibly deduct the out-of-pocket costs as long as they're qualified medical expenses in the eyes of the IRS. The catch is you can only deduct the part of the expense that's over 7.5 percent of your adjusted gross income. So, if the expense is quite small, you may not qualify at all. For example, with an adjusted gross income of $30,000, the cost would need to be beyond $2,250.
- Charitable donations: In response to the pandemic, the IRS has removed charity contribution limits for 2020, so rather than just deducting charity donations of up to 60 percent of your adjusted gross income like before, this can now go up to 100 percent. You'll just need to make sure your donations qualify based on IRS guidelines.
Standard vs Itemized Deduction Amounts
You can consult the current IRS standard deduction amounts and often know right away how much to deduct based on filing status. For example, someone filing as head of household for the 2020 tax year would deduct $18,860, someone single would deduct $12,400, married couples filing separately would deduct $12,400, and married couples filing jointly would deduct $24,800. However, you can add $1,300 to these numbers if you're blind or older than 65.
However, the IRS offers a major exception from these amounts if someone else claims you as their dependent. You can expect at a minimum to get a standard deduction of $1,100. Otherwise, the IRS will take your earned income and add $350 to get the amount, but keep in mind the total can't go above the base standard deduction amount for your filing status.
When you itemize, however, the deduction amount you get depends on the amounts entered on Schedule A, Itemized Deductions, as well as the calculations the IRS requires and rules associated with specific deductions. The expenses claimed must have been paid by you, and you need to fall within certain limits for things, like mortgage interest and medical expenses. After you've completed the form you'll know the itemized deduction amount. It will differ by taxpayer.
Standard Deduction Benefits
If you're wondering why so many taxpayers choose to take the standard deduction, then consider these benefits the option offers:
- High amounts available: Prior to the Tax Cuts and Jobs Act of 2017, the standard deduction amounts were much less regardless of one's filing status. For example, a single taxpayer only got a $6,350 deduction in 2017 while a married couple filing jointly got $12,700. With these amounts nearly double for the 2020 tax year, many taxpayers can take the standard deduction and be better off than itemizing.
- Broad eligibility: If you're a typical taxpayer, chances are good that you qualify to take the standard deduction. In fact, the estimated number of people who've chosen the option has ranged from 70 to 90 percent of Americans, with the increase occurring as the standard deduction amounts went up after 2017.
- Simplicity: As long as you know your tax filing status and can confirm you don't fall into one of the ineligible categories, determining your standard deduction is usually simple. You can just look at the current amounts for the year and enter that deduction amount on your Form 1040. If you do end up falling into one of the categories where some calculations are needed, you can use the "How Much Is My Standard Deduction?" tool.
- Less work on your tax forms: If you're a person who wants to deal with the least hassles for your taxes, then the standard deduction can help. Determining your amount takes a lot less work than filling out Schedule A and locating documentation. So, taking the standard deduction can appeal to you whether you take a DIY approach to tax returns or hire a preparer.
Standard Deduction Drawbacks
There are only a few drawbacks to taking the standard deduction, and whether they impact you depends on your tax situation:
- Limited amounts: With the standard deduction, you get a guaranteed amount, 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. If you fall into the group of taxpayers who've incurred far more deductible expenses than the standard deduction limit, you miss out on the highest potential deduction.
- Limits on eligibility: Filing separate tax returns as a married couple can create problems when your spouse itemizes and you want the standard deduction, as the IRS doesn't let you mix and match. Irregular tax periods and your alien status also place limits on eligibility.
Itemized Deduction Benefits
When choosing to itemize, you could get these benefits as long as your expenses qualify:
- Available to all: While the standard deduction has wide availability, the IRS makes itemizing deductions available to any taxpayer. So, if your spouse itemizes, so can you. The same is true if you're filing for an irregular tax year or have nonresidential alien status. Even if it's not the higher deduction choice, the IRS leaves it up to you to decide.
- Common expenses qualify: Whether you own a home, face large medical bills or suffer losses due to theft, you could benefit from reporting these costs on your Schedule A and itemizing. While the category of allowed miscellaneous deductions has shrunk since the Tax Cuts and Jobs Act, 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: While most taxpayers find the standard deduction more beneficial, that may not be the case for you. For example, consider you may have faced a medical bill of tens of thousands of dollars, paid high property taxes and faced major losses. Running your numbers through Schedule A might yield a higher amount than your standard deduction if you itemize.
Itemized Deduction Drawbacks
If you plan to itemize, be aware of these potential drawbacks:
- More work: Using this method requires completing Schedule A where you list each itemized expense and sometimes do complex calculations. You also have to research all the IRS rules as each expense has different criteria. Plus, you need to hunt for more documents to back up all those expenses from the year.
- Restrictions on certain deductions: Even if you incurred a big major expense or paid a lot of interest, there's no guarantee it will actually qualify. For example, some expenses have adjusted gross income limits or only allow deductions for certain property types or uses.
- Potentially lower amount: With the higher standard deductions, many taxpayers just get a better return without going through the itemizing process. This can lead to completing Schedule A but taking the standard deduction anyway.
Taking the Standard Deduction
If you've found that the standard deduction offers the largest deduction or will save you considerable time versus itemizing, you don't have to do much work. Go down to line 9 of the first page of your Form 1040 to find a place to put the amount. For your convenience, the IRS lists the base deduction amounts for most taxpayers to the left for your reference. If you file using tax software or hire a tax preparer, you can just tell the software or person you want the standard deduction.
Taking Itemized Deductions
If you prefer to itemize or have to do so per IRS requirements, then you'll also find the box to put your deduction amount on your Form 1040's line 9. However, you or your tax preparer will need to go through the Schedule A form to identify and input all relevant itemized deductions and follow the form's instructions closely to get a total on line 17. Schedule A has several sections that may apply to you, including those covering dental and medical expenses, interest paid, taxes paid, charitable gifts, losses from casualties and theft and other itemized deductions.
As you get to the end of the form, you'll notice that the IRS tells you to transfer your total itemized deductions to line 9 of Form 1040. It also asks you to check a box if you itemize despite getting a lower amount than the standard deduction would be.
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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.