In this article, I will go over standard vs itemized deduction, or in other words, how to lower your taxable income.
I know filing your taxes isn’t the most entertaining thing to do. However, understanding how it works is necessary. That way, you can be sure that you are making the right financial decision.
According to Taxfoundation, only 13.7% of taxpayers will choose the itemized deduction for the year of 2019. So let’s determine what’s best for your tax situation.
What To Know About Standard Deduction?
[Definition] What Is Standard Deduction?
The standard deduction is easier to manage and understand than the itemized deduction.
It’s a fixed dollar amount that you can deduct from your taxable income. It doesn’t matter how much you make or give. The deductible amount is the same for everyone that has the same filed tax status.
How Much Can You Deduct From Standard Deduction?
In 2019, the standard deduction:
- $12,200 for single or married filing separately
- $24,400 for married filing jointly
- $18,350 for head of household
If you file as married filing separately and you claim the standard deduction, your spouse will have to claim the same deduction. You can’t claim the standard deduction if your spouse is claiming the itemized deduction.
There are additional deductions you can get if you:
- Are legally blind
- Have been a victim of a disaster related casualty loss
- Are 65 or older on Dec. 31st of the current tax year or Jan. 1st of following tax year
You can claim $1,650 for each deduction if single or head of household. Similarly, you can claim $1,300 for each deduction if married, widow, or widower.
What Are The Standard Deduction Pros?
You can claim the standard deduction, no matter your tax or financial situation. There are no questions asked, and no proof needed.
Also, you’ll save a lot of time when filing your tax return compared to the itemized deduction.
What Are The Standard Deduction Cons?
The biggest con is that your deduction is fixed, so you can’t deduct more than the limit.
What To Know About Itemized Deduction?
[Definition] What Is Itemized Deduction?
The itemized deduction helps you lower your taxes because you can deduct specific expenses from your taxable income.
Those expenses need to be allowed by the IRS. So you have to pick and choose which ones to use depending on your situation.
What Are The Most Popular Itemized Deductions?
The most popular itemized deduction are:
- Charitable contributions
- State and local taxes (capped at $10,000)
- Real estate property taxes
- Home mortgage interests
- Medical and dental expenses (above 7.5% of your income)
What Are The Itemized Deduction Pros?
If you choose the itemized deduction, you can deduct a lot more expenses from your taxable income compared to the standard deduction.
For example, if you had out-of-pocket medical or dental expenses, it can quickly add up.
It’s worth looking into all the deductible expenses allowed by the IRS to find out which ones you would have missed.
Even if your itemized deduction doesn’t exceed the standard deduction, you might end up paying fewer taxes by itemizing. As a result, you might want to try both deductions to know which one is more advantageous in your situation.
What Are The Itemized Deduction Cons?
If you claim the itemized deduction, you need to keep track of your expense receipts. In case of an audit, you will have to show those receipts to verify your deductions.
Each itemized deduction has rules that you’ll have to follow. So before itemizing, do your research to make sure you are eligible for the deduction.
For example, the state and local tax deduction are capped at $10,000.
Another con is that it takes more time to file your tax return in comparison with the standard deduction.
Also, be aware that certain itemized deductions can increase your chance of an IRS audit.
How To Decide Between Standard Vs Itemized Deduction?
As a rule of thumbs, if the itemized deduction is higher than what you can get from the standard deductions, you should go with itemized deductions and vice versa.
If you are not sure what’s best for your situation, you should try both deduction categories so you can see which one will reduce most of your taxable income.
Tax laws are regularly changing. So even if you chose the itemized deduction in the past, it doesn’t mean it’s still the best option for you today.
For example, between 2017 and 2018, the standard deduction went from $6,350 to $12,000.
Bonus – A Few Tax Tips
- If you choose the itemized deduction, take a picture of every expense receipt, and upload them in a cloud service. It’ll be easier to look from them in case of an IRS audit.
- Keep all your physical tax documents in the same folder.
- If your tax situation doesn’t sound too complicated, you can try free online services.
- However, if you don’t feel comfortable filing your tax return alone, you should get help.
In conclusion, knowing how to choose between standard vs itemized deduction is critical because it can help you save a lot of money.
If you don’t want to spend time figuring out which deduction to claim, you should take the standard deduction. It’s the simplest and quickest option.