standard
Before you file, understand whether a standard deduction vs. itemized deduction is best for you.
While you don’t have much choice when it comes to paying taxes, you can benefit from significant deductions that reduce the amount you owe Uncle Sam.
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The pros and cons of
tax deductions
vs.
itemized
Imagine you have $100,000, and you get to make some of that invisible (to taxes).
"Imagine you have $100,000, and you get to make some of that invisible (to taxes)," says Tim Clairmont, founder and CEO of Clear Financial Partners, a wealth management firm in Lake Oswego, Oregon.
That's what a deduction does. It shields a portion of your earnings from income tax.
Deductions are especially important now that personal exemptions have been eliminated. In the past, taxpayers could claim an exemption of $4,050 for themselves and each of their dependents. However, those exemptions were eliminated for the 2018 tax year under the Tax Cuts and Jobs Act, making deductions now the prime way to reduce taxable income.
a standard deduction or itemized deductions.
Taxpayers have
two deduction options:
While the standard deduction is the government's built-in subtraction that you can take while preparing your taxes, itemizing is composed of individual deductions that, together, can help lower the amount of taxable income you pay.
Read on to discover the pros and cons of a standard deduction vs. itemized deduction to decide which approach is best for you.
Standard deduction
To compensate for the loss of personal exemptions, the standard deduction was nearly doubled for the 2018 tax year, and it was again adjusted upward for 2019. Depending on your tax-filing status, you are entitled to take one of the following standard deductions:
Single or married filing separately
$12,200
$18,350
Head of household
$24,400
Married filing jointly or qualified widow(er)
— Tim Clairmont, Clear Financial Partners
— Kim Dula, Friedman LLP
Everyone is entitled to
a standard deduction.
"Everyone is entitled to a standard deduction," says Kim Dula, managing partner in the Philadelphia office of the accounting firm Friedman LLP. There are no eligibility requirements, no special forms to complete and no income limitations. As Dula puts it, "It's a freebie."
Here are the key benefits of the standard deduction:
It's easy, convenient and saves time
Some taxpayers qualify for a bigger deduction
Anyone can claim it
It's easy, convenient and saves time.
If you like to keep your taxes as simple as possible, opting for the standard deduction might be the wise way to go. The standard deduction is essentially an automatic process that doesn't require you to devote time or energy to tracking expenses. As a result, it saves you the trouble of providing documentation, filling out a Schedule A form or needing to understand nuances of tax law.
Some individuals might be eligible for an increase in their deduction based on age or disability. Taxpayers who are age 65 and older or blind are entitled to an additional deduction of $1,300 to $1,650, depending on their tax-filing status.
Some taxpayers qualify for a bigger deduction.
Anyone can claim it.
You'll be allowed to take a standard tax deduction even if you don't have expenses that qualify you to make itemized deductions.
Though the standard deduction is a simple method, it might not be the best option based on your financial situation. Here are the drawbacks of taking the standard deduction:
Standard deductions have filing limitations
You might end up with a smaller deduction
Standard deductions have filing limitations.
You won't be able to take a standard deduction in a few scenarios. If you're married and filing separately, you can't claim a standard deduction if your spouse itemizes his or her deductions. Though not as common, if you're a nonresident alien, a dual-status alien or someone who is filing a tax return for a period of less than a year, then you won't be eligible for the standard deduction. Your deduction can also be limited if you've been claimed as a dependent on someone else's taxes.
You might end up with a smaller deduction.
The standard deduction amount might be lower than the amount you could deduct if
you itemize. For example, the standard deduction might be less than the total
amount of mortgage interest, real
estate taxes and charitable
contributions you've paid and
could deduct.
Itemized deductions
Unlike the standard deduction, itemized deductions can result in a different amount for each taxpayer. Itemized deductions are claimed on a Schedule A form and are broken down into five main categories:
1. Medical and dental expenses
2. Taxes you paid
3. Interest you paid
4. Gifts to charity
5. Casualty and theft losses
There is also a line for other itemized deductions, which covers less common situations such as gambling losses and certain unrecovered investments in a pension. However, for most people, state and local taxes, mortgage interest and charitable donations will make up the bulk of their itemized deductions, says Timothy Speiss, co-leader of the personal wealth advisors group at accounting firm EisnerAmper in New York City.
Here are the benefits of itemized deductions:
You can claim more expenses
You can save more money in taxes
You can claim more expenses.
You can save more money.
Mortgage interest, property taxes and medical bills are just a few of the expenses allowed with itemization. While some of these categories have caps or limitations,
taxpayers with large
mortgages who give
generously to charity
may find they get a
larger deduction by
itemizing.
Because you can include more deductions when itemizing, you might stand to earn a larger tax refund. The amount itemizing saves you will depend on your tax bracket. For instance, income taxed in the 25% tax bracket will see a 25 cent tax savings for every dollar itemized above the standard deduction.
It takes more paperwork and effort to itemize
There are restrictions on some itemized deductions
Itemizing deductions does come with some drawbacks, however. Here are the disadvantages of itemized deductions:
Unlike standard deductions, itemizing is a manual process that requires gathering documentation and tallying expenses. Depending on how good your records are and the amount of your deductions, this
time-consuming process might not reduce your taxable income enough to make it worth the effort.
The Tax Cuts and Jobs Act caps the itemized deduction for state and local taxes, including property taxes, at $10,000. What's more, interest on home equity loans taken out for purposes other than a renovation are no longer deductible, and only interest on the first $750,000 of a new mortgage can be included. If you want to deduct medical and dental expenses, only those in excess of 10% of your adjusted gross income are eligible to be itemized.
It takes more paperwork and effort to itemize.
There are restrictions on some itemized deductions.
— Timothy Speiss, EisnerAmper
The standard deductions are designed for people who don't own a home
Should you itemize deductions?
Anyone with deductible expenses that exceed the standard deduction should itemize. "Think of (the standard deduction) as a hurdle," Clairmont says. "You have to get over that hurdle to itemize."
For many people, it could be hard to clear that amount unless they have mortgage interest or property taxes to deduct.
"The standard deductions are designed for people who don't own a home," Speiss says. Unless someone has significant
charitable gifts or a major
medical event, it may difficult
to find enough deductions
to itemize otherwise.
Even those who don't think
they can itemize should be
tracking expenses to be
sure they aren't missing out
on a tax break, Dula says. What's more, those who can't itemize on an annual basis may be able to do so for some years if they bundle their charitable contributions.
"More and more people are using donor advised funds," Dula explains. Philanthropically minded taxpayers can make a sizable — and deductible — contribution to a fund in one year and then slowly disburse that money to charity over time.