Income Tax Deductions: Itemized Versus Standard

Income Tax Deductions: Itemized Versus Standard

Tax season is well underway. If you haven’t already filed your income tax return for the 2023 tax year, you’re either getting ready to start the process or already in the swing of things. One of the questions you might need to address is whether to take the standard deduction or itemize your tax deductions.

The answer to that question is really easy, at least in theory. You take the deduction that offers you more tax savings. But how do you know which one offers more tax savings? That’s a tougher question and its answer depends on your unique situation. However, if you’re like most taxpayers, you’ll be better off taking the standard deduction. But why is that? We’ll answer that question in this blog post, but before we do, let’s take a quick look at tax deductions.

An Overview of Standard and Itemized Deductions

A tax deduction is an expense that the IRS (and/or state and local taxing authorities) recognizes as lowering your taxable income. For example, if you earned $100,000 during the tax year and have a $20,000 tax deduction, you pay taxes on $80,000, not $100,000.

When you prepare your income tax return each year, you can take deductions to lower your taxable income. You can add up each expense that qualifies as tax deductible (this is what you do when itemizing your tax deductions), then subtract it from your taxable income. Alternatively, you can take a standard deduction and save the time and effort of itemizing your taxes.

What’s a Standard Deduction?

A standard deduction is a set amount of money you can take from your tax return to reduce your taxable income. The exact amount usually depends on the tax year (it gets adjusted each year for inflation) and your tax filing status. For the 2023 tax year, the standard deduction for most taxpayers is as follows:

  • $13,850 for single filers of married filing separately
  • $20,800 for head of household
  • $27,700 for married filing jointly

For the 2024 tax year, the standard deduction will be:

  • $14,600 for single filers of married filing separately
  • $21,900 for head of household
  • $29,200 for married filing jointly

Taxpayers who are 65 or older and/or blind can increase the standard deduction anywhere from $1,500 to $3,700. If their spouse is 65 and older and/or blind, the standard deduction can be further increased.

Who Can Take the Standard Deduction?

Most individuals and married taxpayers can take the standard deduction, but in the following situations, you can’t take the standard deduction:

  • You’re filing an individual tax return for a time period that’s less than a year (that’s the result of a change in your accounting period).
  • You’re married and your spouse is filing separately and chooses to itemize deductions.
  • You’re filing as a trust, partnership, common trust fund or estate.
  • You were a dual-status alien or nonresident alien during the tax year (there is an exception to this if you’re married to a U.S. citizen or a resident alien at the end of the tax year).

When Is It Worth Itemizing Tax Deductions?

You’ll likely itemize your tax deductions in three primary situations. First, the standard deduction isn’t available to you for one of the above-referenced reasons. Second, your standard deduction has been reduced because another taxpayer claims you as a dependent. Third, your total allowable itemized deductions add up to an amount that’s larger than your available standard deduction.

How do you know if your itemized deductions add up to a larger amount than the standard deduction? You’ll have to identify what expenses from the tax year qualify as tax deductible.

How to Take Itemized Deductions

There are a lot of expenses that you can deduct on your income tax return. Among the most common are:

  • Certain unreimbursed medical expenses. These must not only be out-of-pocket costs, but you can only deduct the amount that exceeds 7.5% of your adjusted gross income.
  • Real estate taxes.
  • Mortgage interest.
  • Charitable contributions to IRS-recognized charities. Depending on the specific charitable deduction, you’re usually limited to a charitable deduction that’s between 20% and 60% of your adjusted gross income.
  • State and local income taxes.
  • Sales tax.
  • Personal property taxes.
  • Casualty losses. The key conditions for this deduction are that the losses must be more than 10% of your adjusted gross income (minus $100) and sustained as a result of a federally declared disaster.
  • Gambling losses.
  • Unreimbursed employee expenses for qualifying jobs (most jobs don’t qualify, unfortunately).

If you choose to itemize your deductions, you’ll usually use Schedule A (Form 1040), Itemized Deductions.

One Last Thing About Itemizing Tax Deductions

You can look at the numbers to tell yourself whether it’s worth taking the standard deduction or itemizing your deductions. But going with the bigger deduction isn’t always the best decision for all taxpayers.

For example, if itemizing your deductions gives you an extra $200 in deductible expenses, is it worth the time and effort of itemizing? Spending an entire year asking for donation receipts, keeping track of medical bills, and figuring out what’s deductible might not be worth the added stress and work. And remember, deductions are not the same as credits. So an extra $200 in tax deductions won’t usually result in an extra $200 in your bank account.

That being said, if you already did all the work of keeping track of necessary documents and adding up all your itemized deductions, you might as well take it if it’s bigger than the standard deduction. But perhaps you’ll go into the next tax year with the assumption that you’ll take the standard deduction and save the time and effort of trying to itemize. And if you’re still not sure what to do, you can always consult with a tax professional for advice. They can help you identify deductible expenses and confirm whether the IRS will recognize an expense you want to deduct.

Kienitz Tax Law is here to help you with your tax issues. Schedule your FREE consultation today!

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