It’s the new year, which can only mean one thing: Tax season is coming up!
In 2020, it’s estimated that the IRS will process more than 150 million individual tax returns. Are you ready for April 15?
As you sort through tax documents and file your return, you’ll notice that there is a section where you can choose between standard vs itemized deductions. These both offer you the opportunity to lower your taxable income.
However, it can be difficult to decide which one to choose. Do you take the standard, fixed-amount deduction? Or, do you go the itemized route and list your deductions out individually?
Today, we’re here to clear up the confusion. We’ll discuss the difference between standard and itemized deductions, as well as the pros and cons of each.
Read on to learn everything you need to know before you file!
What is the Standard Deduction?
In short, the standard deduction for each tax year reflects a single, fixed dollar amount. If you claim it, it can effectively lower the amount of income that the IRS taxes you on.
One aspect to note? There isn’t a one-size-fits-all standard deduction.
The amount of money that you can claim will vary based on your filing status. For the 2019 tax year (filing in 2020), the numbers are as follows:
- Single: $12,200
- Married Filing Jointly and Surviving Spouse: $24,400
- Married filing Separately: $12,200
- Head of Household: $18,350
There are also additional standard deductions that apply to the 2019 tax year. These include:
- Blind taxpayers: $1,300
- “Aged” taxpayers over the age of 65: $1,300
If either of these categories applies to an unmarried taxpayer, it increases to $1,650.
What if you’re an individual who can be claimed as a dependent by another taxpayer? In this case, your standard deduction cannot exceed:
- $1,100 or
- The sum of $350 plus your earned income
How Do You Claim the Standard Deduction?
Depending on your filing status, you’ll deduct the amount of your standard deduction from your taxable income.
That means if you’re a single taxpayer with an annual income of $50,000, you can subtract $12,200. This means you’ll only be taxed on $37,800.
If you’re filing as married filing jointly with a combined taxable income of $100,000, you can deduct $24,400. Your joint taxable income then becomes $75,600.
Pros of Claiming the Standard Deduction
Are you considering claiming the standard deduction? Here are a few of the benefits you can expect.
Easy, Convenient, and Quick
Let’s begin with the obvious.
Claiming the standard deduction saves time! You don’t have to worry about going back through all of the past tax year’s expenses and tracking them one by one.
Almost any taxpayer can claim the standard deduction, even if you don’t have enough expenses to qualify for an itemized deduction.
If you want to keep the tax-paying process as simple as possible, the standard deduction can get you there. It’s easy, convenient, and virtually automatic.
When you go this route, you don’t have to provide additional documentation about your expenses. You can also avoid filling out a Scheule A form or learning the ins and outs of the most recent tax law.
Additional Deductions
Did you notice the aforementioned additional standard deductions?
On top of the standard deduction that anyone can claim, individual taxpayers will qualify to lower their taxable income by even more.
These additional standard deductions are based on age and disability status.
Cons of Claiming the Standard Deduction
The standard deduction might be simple, but it isn’t a golden ticket.
Depending on your financial situation, there could be some drawbacks to claiming it. Let’s take a look at a few of the top ones.
Filing Limits
While it’s true that all taxpayers are eligible to claim a standard deduction, there are a few extenuating circumstances that could prevent you from filing this way.
For instance, say you’re married, but you and your spouse decide to file separately. If one of you chooses to itemize his or her deductions, the other cannot claim the standard deduction.
Other taxpayers who cannot claim a standard deduction include:
- Nonresident aliens
- Dual-status aliens
- Those filing a return for a tax period of less than one year
Potentially Lower Deductions
While it might be cumbersome to itemize, you could have more individual expenses than you realize.
In some cases, you could even qualify for a higher deduction that way.
For instance, are you currently paying any of the following?
- Mortgage interest
- Charitable contributions
- Real estate taxes
If so, consider the amount that these separate payments add up to.
Then, compare that total against the standard deduction that matches your taxpayer filing status.
In this case, choosing to take the easy way out could mean leaving money on the table.
What is an Itemized Deduction?
The standard deduction is a fixed amount determined by your filing status. On the other hand, each taxpayer will have a different itemized deduction.
This is because, with this option, you’ll go back throughout the year and take note of all your major expenses. Some of the most common expense categories include:
- Mortgage interest payments
- State and local income
- Property taxes
- Charitable donations
- Medical and dental expenses
If you choose to itemize your medical or dental expenses, 2019 tax law mandates that you can only claim those that exceed 10% of your adjusted gross income.
How Do You Claim an Itemized Deduction?
If you decide to itemize your expenses, you’ll need to fill out IRS Schedule A: Form 1040 or 1040-SR.
When you begin this form, you’ll find that there are five distinct categories to group your expenses into. These include:
- Taxes
- Interest
- Medical and dental expenses
- Gifts to charity
- Casualty and theft losses
You’ll list each deduction out individually under the appropriate category.
In addition, you can also file less common deductions, including gambling losses, under a separate line.
Keep in mind that even if you decide not to itemize your deductions, you should still be tracking your expenses and keeping a close eye on where your money goes.
This way, you can ensure that when tax time comes, you don’t miss out on a valuable tax break.
Pros of Itemizing Your Deductions
Why should you go to the trouble of itemizing your deductions when you can just take the standard deduction and be done in minutes?
Let’s take a look at some of the top reasons why it might pay to choose this option.
Ability to Claim More Expenses
When you choose to itemize your expenses, you can claim more than just your mortgage interest, property taxes, and medical bills.
Although many of the itemizing categories have monetary limits, it could be worth your while to explore this route. This is especially the case if you have a substantially large mortgage bill or give generously to charity throughout the year.
Potentially Higher Refund
The fact that itemized deductions are more inclusive means that taxpayers can possibly see a higher tax refund.
Are you wondering if this applies to you?
The answer to how much you stand to save lies in your tax bracket. For example, is your income taxed in the 25% tax bracket?
If so, you’ll earn 25-cent tax savings for every dollar that you itemize above the standard deduction.
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Cons of Itemizing Your Deductions
If you have a substantial number of expenses in specific categories, itemizing your deductions can be worth the time and effort.
However, some situations could render it, not in your best interest.
Here are a few potential disadvantages to note.
Laborious and Time-Consuming
While standard deductions are an automatic process, itemizing your deductions is a manual effort.
To get accurate numbers, you’ll have to track down all of the documentation that details your expenses. You’ll also need to tally everything up.
If you’ve kept excellent records and your expenses are significant, this might not be a terribly time-consuming step.
On the other hand, if your records are less than organized and your expenses are minimal, you could be better off taking the standard deduction.
Categorical Caps
The Tax Cuts and Job Act (TCJA) of 2017 placed caps on several categories of itemized deductions.
For instance, you cannot claim a property tax deduction that exceeds $10,000. The same applies to state and local taxes.
Moreover, as mentioned, you can only claim a medical or dental expense if it’s greater than 10% of your adjusted gross income.
Another change that the TCJA brought to Schedule A?
Before its implementation, taxpayers were able to itemize all the interest they paid on their home equity loans, regardless of the reason that they took the loans out in the first place.
Now, you’re unable to itemize any interest on a home equity loan unless it was taken out specifically for renovation purposes. Moreover, you can only claim the interest you paid on the first $750,000 of any new mortgage.
2020 Changes to Standard vs. Itemized Deductions
The information and instructions detailed herein apply to the tax year 2019.
Moving forward into 2020, there are changes planned that taxpayers should know before April of 2021.
This year, the standard deduction is set to increase. However, the change is minimal, and most taxpayers won’t notice a substantial difference. Below are the new numbers to note:
- Single: $12,400 ($200 increase)
- Married Filing Jointly and Surviving Spouse: $24,800 ($400 increase)
- Married Filing Separately: $12,400 ($200 increase)
- Head of Household: $18,650 ($300 increase)
Though these increases aren’t major, they’ll likely persuade even more taxpayers to take the standard deduction.
In fact, it’s estimated that 90% of taxpayers will go this route, especially after the TCJA capped certain itemized deductions, affecting 2018 taxpayers and beyond.
Navigating the Difference Between Standard vs. Itemized Deductions
Now that you know the distinction between these two forms of taxpayer deductions, how can you know which one to choose?
For many people, the answer will be a matter of convenience.
If time is less of an issue, taxpayers can weigh both options, consider their overall expenses and discern which route will result in the lowest tax bill possible.
The good news? It doesn’t take an advanced math degree to do the calculation.
You’ll simply need to see where your expenses line up when you compare the options against each other.
Are you a married couple filing jointly with expenses that exceed $24,400? If so, it makes sense to itemize.
Otherwise, you can stick with the standard deduction and save your sanity.
The same applies if your total expenses are around $24,800, but your receipts are all over the place, and you’re not 100% confident that all of your documents are accurate. In this case, you’re still better off taking the standard deduction.
If time is of the essence and you’re simply trying to get your taxes done by the deadline, the standard deduction can be ideal.
This is especially true if you know ahead of time that your total expenses from the previous tax year won’t be higher than the pre-determined caps.
Reliable Taxpayer Advice You Can Use
Does the idea of filing your taxes send your head spinning?
Are you still trying to understand the difference between standard and itemized deductions fully?
If so, you’re not alone. Millions of Americans find this annual task more than a little overwhelming.
That’s why we’re here.
We’re a team of experienced and qualified tax attornies, dedicated to helping taxpayers make sense of all the legal jargon, complicated terms, and ever-changing regulations.
From general tax consulting to emergency tax services and tax fraud investigations, we’ll help you navigate every part of the process. Contact us today to learn more and start making sense of your taxes, one step at a time.
