What’s the difference and why should you care?
So it is tax filing time. You have all your income documents and withholding ready to go. You are cranking through ready to wrap this up and get back to the things you like doing, which taxes are definitely not a part of, and you get to this question: Would you like to use the Standard Deduction or Itemize your Deductions?
You may be tempted to select whichever option gets you done the fastest. Stop! Unless it is April 15th (or October 15th) at 11:59pm, the fastest choice may not be the best choice. Why you ask? Have no fear, faithful reader, I am here to set you down the right path.
Why it Matters
The short answer is that either one of the options save you money. Deductions reduce your taxes. How? They reduce the amount of money on which you have to pay tax. If you make $50K, a tax deduction of $10K would have you pay tax on $40K, which might save you $1,000 in tax if you didn’t have the deduction. Tax Credits work a little differently and I have dig into that in this fancy post here.
The Standard Deduction
So what is the “standard” deduction. Your mama always said you were special, and you are. The standard deduction is a base level tax deduction offered to all taxpayers. The amounts fluctuate primarily based on your filing status. We can cover filing status in another post. Often your age can increase the standard deduction you are eligible to claim as well. You are permitted to claim the standard deduction no matter how much money you make. The amount changes from year to year. The 2017 Tax Cuts and Jobs Act basically doubled the standard deduction amounts and reduced a lot of the need for itemized deduction filing.
Itemizing Deduction
The alternative to utilizing the standard deduction is to itemize out your deductions. The IRS Code allows taxpayers to deduct 5 broad categories of deductions, when combined, are your Itemized Deductions: Medical Expense, State and Local Taxes, Interest Expenses, Charitable Contributions, and Miscellaneous. There are nuances and details to all of these deductions that would need to be covered in separate posts like Explaining the Mortgage Interest Deduction. When Itemizing your deductions, you add the totals of each of these five categories and the total is your deduction. With itemizing deductions, your income matters. With the passage of the One Big Beautiful Bill, it reintroduced certain income limitations that factor into how much of your itemized deductions that you are permitted to deduct.
Pros and Cons
The biggest benefit of the standard deduction is that it is the simplest which also means quickest. You take the deduction allotted to your filing status. The downside is that you could be leaving money on the table. Conversely, the biggest benefit of itemizing your deductions is that you could save more tax dollars. The con of itemizing is the additional time it takes to gather documentation of your expenses and calculate each deductible amount. Depending on how you file your return, there could also be additional filing cost if your tax preparer charges extra to prepare Schedule A, the extra form you file to report your deductions, or your tax software may charge more to calculate it.
So How Do You Decide?
You may be feeling like you want to pull your hair out at this point. when comes to figuring out which deduction to you use. Usually, you just take the biggest…except when you don’t.
It doesn’t always come down to picking the biggest. In most cases, it will. There are a couple of other items to keep in mind though. If your filing status is married filing separately, you are required to use the same deduction method as your spouse. You both have to either take the standard deduction or itemize. You can’t split. Another item to consider is state tax filings. In some instances, it could provide a better combined federal and state result to take a lower itemized deduction on the federal return so that you can take a larger itemized deduction on the state return. States generally follow IRS guidelines, but individual state standard deductions vary greatly, and they often have different thresholds for limitations on itemized deductions.
The IRS has tools to help you in calculating your itemized deductions and most tax softwares will help you optimize which is best on the federal return.
Summary
Here is a quick checklist to help you in your decision:
Filing Status – to determine the amount of your standard deduction
Information for potential itemized deductions:
Form 1098 for mortgage interest and maybe real estate taxes
W-2 for State income taxes paid
Documentation for major charitable deductions
How does your state standard deduction or itemized deduction vary from the federal?
There is your basic primer on taking the standard deduction or choosing to itemize. As always, this is a blog post and not intended to be considered tax advice. Taxes are highly dependent on your own personal situation and this post is just to point you in the right direction. Please consult and engage with a tax professional for recommendations regarding your own personal specific circumstances.
Until next time…