Before tax season rolls around, you have to make sure you’ve got all your information in order. If you’re unsure what standard or itemized deductions are and want to get a better grip on your filing methods, you’ve come to the right place.
Yearly, the Internal Revenue Service, more commonly known by the acronym IRS, is responsible for collecting taxes which can vary wildly according to several factors. The bottom line is that the IRS gives all Americans the benefit of reducing said taxes through various means. These can come through various cuts or benefits.
The standard deduction and itemized deduction are the two main ways in which people can lower their taxes significantly. You can only take one route so before you choose, make sure your selection will allow you to save the most amount of money. What’s the difference and how do you know if you’ve made the right choice? Lets find out.
Standard Vs Itemized Deduction
Most Americans opt for a standard deduction because it’s less time consuming and more straightforward. An itemized deduction implies going over all qualifying expenses through the year and can include gambling losses, property tax, medical expenses, eligible charity donations, amongst others. Basically, anything that influences your bottom line tax goes here. Although, make no mistake, it is possible to save more money by going this route, but the hassle is significant.
Then again the standard deduction has increased recently, so more and more people have decided to file their taxes in this way. Simply put, if your standard deduction is greater than the sum of your tax-deductible expenses, it should be the obvious choice.
If it helps with your decision-making process you should also keep these recent changes in mind: in 2017, a tax bill limited the total state and local tax deductions to $10,000 and mortgage interest deduction (only on properties bought after the 15th of December 2017) to $750,000.
Unsure about itemized deduction? Follow this link to find everything you need to know!
Understanding the Standard Deduction
So, let’s get into the nitty-gritty, shall we?
First, we have to get into the difference between taxable income and total income earned. Total income earned is pretty self-explanatory. This is the amount of money you’ve gained over the past year before taxes. Taxable income is the amount of money left after a subtraction, which is naturally smaller.
There are different standard deduction amounts based on your filing status, age, whether or not you are disabled or if you’ve claimed as a dependent on someone else’s tax return.
Here are the numbers for 2019 taxes filed in April 2020:
- $12,200 for single taxpayers
- $12,200 for married taxpayers filing separately
- $18,350 for heads of households
- $24,400 for married taxpayers filing jointly
- $24,400 for qualifying widow(er)s
A single tax filer with a total income (gross income) of $80,200 was able to reduce it by $12,200. Thus, his or her taxable income would have been $68,000, bringing the tax bill will to $10,905 (16.03% effective tax rate). Compare that to $15,535 (19,42% effective tax rate) he or she would have paid on the entire amount of $80,000.
Thanks to the Tax Cuts and Jobs Act, the standard deduction amounts have risen and are set to expire on the 31st of December, 2025.
Here are the numbers for 2020 taxes filed in April 2021:
- $12,400 for single taxpayers
- $12,400 for married taxpayers filing separately
- $18,650 for heads of households
- $24,800 for married taxpayers filing jointly
- $24,800 for qualifying widow(er)s
As we mentioned earlier, the amount you can deduct is also dependant on your age and any disabilities you might have.
Those aged 65 and over who are single or the head of the household receive an additional $1,650 bump. For married couples, there are even more variables. If you are filing jointly and only one of you is 65 or older your standard deduction goes up to $1,300, but if both of you are over the age of 65 then the number increases to $2,600.
Individuals who are blind require a certified letter from an eye doctor. Those with noncorrectable 20/200 vision in their best eye or those who have a field of vision of 20 degrees or less can qualify for further increases when they apply. Thus, if you’re single or the head of your household, your deduction will increase by $1,650. Legally married couples who are also legally blind get their deductions bumped up by $2,600 but if only one of them qualifies, then the standard deduction only goes up $1,300.
Take note of a disaster loss, as only those who suffered in a federally declared disaster area may increase their deduction.
But not everyone can file taxes this way. These are the groups of taxpayers who are limited from the standard deduction:
- Married couples filing separately, if one spouse itemizes
- Nonresident aliens and their spouses (if filing jointly)
The Bottom Line
Eligible taxpayers can pick between standardized deductions or itemized deductions when tax season rolls around. Figuring out how you can save more money is a crucial step in your decision-making process, as you cannot file for both. Due to the latest increase in standard deduction rates, most American households are likely to go this route. Not only that but itemized deductions take longer and require keen supervision of all qualifying expenses.
The amount you can deduct from your gross income heavily depends on your filing status, age and whether or not you’re disabled.
Has this article helped clear the air? We hope you’re ready to tackle your taxes without any hint of stress! Let us know if any of this helped in the comments down below.