How Standard Deductions Work
The difference between a standard deduction vs. itemized is that a standard deduction is a flat dollar amount determined by the IRS that requires less paperwork and record keeping. And for many taxpayers, the standard deduction is higher than your itemized deduction would be which means youll save more on your taxes.
Your standard deduction amount depends on your taxpayer filing status.
What Is An Itemized Deduction
An itemized deduction is a qualified expense you can subtract from your taxable income to lower your tax burden. Qualified expenses include the amount you paid for state and local income or sales taxes , real estate taxes, personal property taxes, mortgage interest, charitable gifts and disaster losses from a federally declared disaster. You also can itemize a portion of your unreimbursed medical and dental expenses .6 Though there are limits on specific types of deductions, the Tax Cuts and Jobs Act eliminated the limit on the total amount of itemized deductions you can claim.
If you have a home mortgage and pay a lot of interest and give generously to your church or another charity, your itemized deductions might add up to more than the standard deduction of $12,950 for single filers or $25,900 for married filers. If thats the case, it will be worth it to itemize your deductions and skip the standard deduction.
Here are some pros and cons of itemizing deductions.
What Is A Standard Tax Deduction
A standard tax deduction is a flat rate that the IRS allows you to deduct from your taxable income with no questions asked. The rate varies depending on your filing status but is pretty consistent across the board.
For example, in 2020 the standard tax deduction amounts were as follows:
- Single taxpayers: $12,400
- Heads of household: $18,650
There are also allowances that can change these dollar amounts such as whether the individual filing is over 65, or blind.
While standard tax deductions are simple, and often save time, there are some exceptions to your ability to file this way. For example, married couples filing separately must file for the same type of deductions. If one spouse files for itemized deductions, the other spouse cannot claim the standard deduction amount.
Furthermore, if either spouse was a non-resident alien during the last year, you cant claim the standard amount. The standard deduction amount is also unavailable if you edit your annual accounting period and proceed to file a tax return covering a space of time fewer than 12 months.
While there are exceptions to the simplicity of the standard deduction, it is a relatively simple and straightforward way to file. That being said, there are also reasons why you should look into an itemized tax deduction.
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Were Any Itemized Deductions Eliminated
Perhaps one of the most important changes made is this: The total deduction for state and local income taxes is now limited to $10,000 per return .
In addition, you can no longer claim miscellaneous itemized deductions, such as tax preparation fees, investment management fees, and unreimbursed employee expenses. In the past, you could deduct those to the extent the total miscellaneous itemized deductions exceeded 2 percent of your adjusted gross income. However, because of that floor limitation, it was difficult to qualify for those deductions anyway.
Other deductions that are no longer available include home equity loan interest and casualty or theft losses .
Advantages Of Itemized Deductions
Itemized deductions might add up to more than the standard deduction. The more you can deduct, the less youll pay in taxes, which is why some people itemize the total of their itemized deductions is more than the standard deduction.
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Casualty And Theft Losses
Any casualty or theft loss incurred as a result of a federally declared disaster can be reported on Schedule A. Unfortunately, only losses in excess of 10% of the taxpayerâs AGI are deductible after subtracting $100 from the loss amount. If a taxpayer incurs a casualty loss in one year and deducts it on their taxes, any reimbursement that is received in later years must be counted as income. Taxpayers must complete Form 4864 and report the loss on Schedule A.
Does It Make Sense To Take The Standard Deduction
If all the itemized deductions you can take add up to more than your standard deduction amount, then it makes sense to track them separately.
Most people, though, take the standard deduction. It’s been especially attractive in recent years. The Tax Cuts and Jobs Act, for example, nearly doubled it in 2017.
As a self-employed person, you’ll have to make this decision along with every other American tax filer. Your business expenses, though, go in a whole other category.
You can always take those on top of the standard deduction.
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Standard Or Itemized: Which Option Is Best For You
The vast majority of taxpayers claim the standard deductionjust over 86%, according to Tax Foundation estimates. Standard deductions are simple, predictable, relatively generous and don’t require extensive documentation and math.
That shouldn’t discourage you from itemizing if you have deductions that add up to more than what your standard deduction would be. Here’s an example:
Say you earned $60,000 in 2021. If you’re single, your standard deduction would be $12,550. But in 2021 you paid $12,000 in mortgage interest and made $2,500 in qualified charity donations. These two deductions alone add up to $14,500almost $2,000 more than your standard deduction. As long as you can document your deductions, you might as well itemize and lower your taxable income by the additional amount. You likely have additional deductions that will lower your income even further.
If you decide to itemize, there’s a long list of potential deductions to consider. You can start with a quick gut check to see whether itemizing is even worth pursuing. A few large potential expenses that can make itemizing worthwhile are:
- Mortgage interest
- State and local income tax
- Property damage due to a federally declared disaster
If you don’t think you spent much in any of these categoriesand you didn’t have notable expenses anywhere else you’re probably among the 9 in 10 taxpayers who are better off claiming the standard deduction.
Standard Vs Itemized Deductions
Prior to the passage of TCJA, millions of taxpayers were able to claim a larger deduction on their tax returns by itemizing their deductions. Thanks to the higher standard deductions, this may no longer be necessary.
To make the most out of your tax return, read on to learn when to itemize your deductions and when to stick with the standard deduction.
Between the 2018 and 2025 tax years, when the TCJA will be in effect, the number of taxpayers for whom itemizing will pay off is likely to drop significantly due to the much bigger standard deduction.
The new law also eliminated a number of deductions taxpayers could take previously and changed some others.
Between the 2018 and 2025 tax years, a change in the tax law nearly doubling the standard deduction has made itemizing tax deductions less advantageous for many taxpayers.
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Unreimbursed Medical Expenses And Dental Expenses
Catastrophic medical expenses have a well-earned reputation for being one of the leading causes of bankruptcy, and they can also significantly impact your ability to pay income taxes. To balance this effect, the government provides a deduction for those whose out-of-pocket medical and dental expenses add up to more than 10% of their taxable income.
Tracking the amount that youâve spent out of pocket can be time-consuming and complicated after the fact, so itâs a good idea to keep a separate file for these receipts throughout the year if youâve suffered a serious illness, accident, or similar high-number expense.
Potential Benefits Of The Standard Deduction
Now that weve explained what a standard deduction is, lets get into the reasons why it might be an option for you.
Like we mentioned previously, using the standard deduction does not require any additional forms, potentially saving you time during tax season. Additionally, many tax filers can claim it, regardless of income. Certain taxpayers could also qualify for an even bigger deduction under the standard deduction, based on age and/or disability.
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How Itemized Deductions Work
When you choose to itemize, there are a few things to keep in mind. First, not every dollar you spend can be subtracted from your income. In the medical and dental deduction category, for example, only expenses that exceed 7.5 percent of your adjusted gross income can be deducted. If you didnt spend that much, then none of your medical costs are deductible.
There also are restrictions on how much you can deduct for casualty losses suffered in a federally declared disaster, as well as limits on the deductibility of very large charitable contribution amounts.
Finally, recent tax law changes placed new limits on the mortgage interest deduction. Interest may only be deducted on mortgage debt up to $750,000. However, the limit remains at $1 million if your loan was originated before December 16, 2017. Home equity loan interest may only now be used as an itemized deduction if the loan funds were used to buy, build, or improve your home.
Cons Of Itemized Deductions
- Itemizing deductions requires more paperwork, filling out Form 1040 Schedule A and keeping records of those expenditures in case you get audited.
- While there are plenty of opportunities to itemize, each category has its own rules and limitations of how much can be deducted.
- Not everyone will save money on their tax bill by itemizing some people will be better off taking the standard deduction.
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What Defines A Verbal Contract
A verbal contract refers to an agreement between two parties that’s made âyou guessed itâ verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don’t pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law âwhich is most of us, right?â due to the fact that there’s no physical evidence to support the claims made by the implemented parties.
What Is The Difference Between Standard Deductions Itemized Deductions And Above
All deductions work by cutting your taxable income, and lower taxable income means less taxes owed for you. Deductions are intentional loopholes, written into the tax code to give you a break for certain financial and life circumstances.
The three different types of deductions weve mentioned differ in where they appear on the tax return, and who qualifies to claim them.
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You Want To Have A Pretty Good Idea Of How Much You Stand To Save By Itemizing Over Taking The Standard Deduction
To itemize your deductions, you can use Schedule A, Form 1040. Qualifying expenses can include:
- state and local income and sales taxes, personal property taxes, real estate taxes
- mortgage interest
- disaster losses from a Federally declared disaster
- gifts to charity
- medical and dental expenses.
Clearly, that can be a lot to keep track of. Sure, you might be able to pull some of that information straight from bank statements. But combing through them and then organizing the expenses can take some time, as you want to be sure all of the amounts are accurate and youre not forgetting anything.
Yet the work may be worth it if the total of your itemized deductions ends up being more than the standard deduction. If youre itemizing deductions, the main thing youre looking for is whether the amount of your itemized deductions is going to be greater than the standard deduction.
For a single taxpayer in 2021, for example, that means youd have more than $12,550 in qualifying expenses to deduct.
The Deciding Factors On Whether To Itemize Deductions Or Take The Standard Deduction
For some taxpayers, there is no question as to the advantages of the standard deduction. Not only is it faster and easier, but they know intuitively that they have not incurred enough out-of-pocket expenses from the qualifying categories to come close to exceeding the amount provided by the standard deduction. For others, the answer is not as clear.
If thereâs a possibility that youâve spent enough on mortgage interest, medical expenses, and other qualifying tax deductions that itemizing may add up to more than the standard deduction, then itâs probably a good idea to sit down and do the math.
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Can I Still Itemize If I Have Lots Of Deductions
Yes! If your itemized deductions total to more than the new standard deduction, you can and should still claim your deductible expenses on your tax return. Its important to calculate the difference to see which is higher. If you use tax filing software like TaxAct®, the program will help you determine which the better option for your situation is.
Is It Better To Itemize Or Take Standard Deduction 2019
Itemizing means deducting each and every deductible expense you incurred during the tax year. For this to be worthwhile, your itemizable deductions must be greater than the standard deduction to which you are entitled. For the vast majority of taxpayers, itemizing will not be worth it for the 2018 and 2019 tax years.
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Here Are Some Details About The Two Methods To Help People Decide Deduction To Take:
The standard deduction is an amount that reduces taxable income. The amount adjusts every year and can vary by filing status. The standard deduction amount depends on the taxpayer’s filing status, whether they are 65 or older or blind, and whether another taxpayer can claim them as a dependent. Taxpayers who are age 65 or older on the last day of the year and don’t itemize deductions are entitled to a higher standard deduction.
Taxpayers benefit from the standard deduction if their standard deduction is more than the total of their allowable itemized deductions. They can use the Interactive Tax Assistant, How Much Is My Standard Deduction? to determine the amount their standard deduction and if they should itemize their deductions.
Taxpayers may itemize deductions because that amount is higher than their standard deduction, which will result in less tax owed or a larger refund. In some cases, they not allowed to use the standard deduction.
A taxpayer may benefit by itemizing deductions if any of following apply to their tax situation, they:
- Had large uninsured medical and dental expenses
- Paid interest and taxes on their home
- Had large uninsured casualty or theft losses
- Made large contributions to qualified charities
Who Should Itemize The Deductions
Generally, it is suggested that anyone with deductible expenses that exceed the standard tax deduction should itemize. So, to decide whether itemizing is worth it, you need to run the number using both methods.
Add up all the personal expenses you wish to claim. If the value of the itemized deduction is more than the standard write-off, then you should consider itemizing and if youre below that threshold, then claiming the standard tax deduction makes more sense.
You may benefit by itemizing on Schedule A if you:
- Cant use the standard deduction or the amount you can claim is limited.
- Have large uninsured medical and dental expenses
- Have mortgage interest or property taxes to deduct
- Have large uninsured casualty or theft losses from a Federally declared disaster
- Made large contributions to qualified charities
Note: Those who cannot itemize on an annually can try to bundle their charitable contributions. For example, by combining 2-3 years worth of contributions into a single year, you can benefit from an increased itemized deduction.
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Do You Have Any Miscellaneous Itemized Deductions
You may be able to deduct a few miscellaneous expenses, but they’re not common.
Before 2018, there were a lot more miscellaneous itemized deductions, but many were eliminated by the Tax Cuts and Jobs Act. Still, a few miscellaneous itemized deductions are available, including:
A final, uncommon category of miscellaneous itemized deductions includes unreimbursed employee expenses for individuals in a qualifying job category. Prior to 2018, these deductions could be made by any employee, but now they’re only available to certain performing artists, people in the military reserves, individuals with impairment-related work expenses, and fee-based local or state government officials.
If you have any of the above expenses, it’s worth your time to investigate further. Taking the standard deduction might be easier, but if your total itemized deductions are greater than the standard deduction available for your filing status, saving receipts and tallying those expenses can result in a lower tax bill.
Remember, with TurboTax, we’ll ask you simple questions about your life and help you fill out all the right tax forms. With TurboTax you can be confident your taxes are done right, from simple to complex tax returns, no matter what your situation.