A new year brings new opportunities and possible ways to save money. The U.S. tax code was reformed by recent legislation, so it’s wise to revisit your filing strategy and compare the new standard deduction vs itemized deduction. Both lower your taxable income, but one option may be better than the other depending on your circumstances.
Our clients often ask about the differences between each strategy: Should I itemize or take the standard deduction? How can I save the most money? Which documents do I need?
This post covers these topics in detail to help you make an informed decision that keeps more money in your pocket. Taxes can be complicated, but it’s our mission to make them a little less scary. Keep reading for advice on standard vs itemized deductions and chat with one of our team members about any questions you may have.
What is a Standard Deduction?
The standard deduction is a fixed dollar amount that reduces your taxable income. (Note: Deductions are a little different than tax credits, which lower your bill dollar-for-dollar.)
The amount of income you can deduct is adjusted for inflation each year and depends on your filing status. In 2019, the federal standard deduction is set to:
- Single: $12,200
- Married filing jointly: $24,400
- Married filing separately: $12,200
- Head of household: $18,350
- Qualifying Widower: $24,400New laws were passed that expand the definition of a “qualified disaster or loss” that may be claimed in addition to the standard deduction. Now, it includes an individual’s casualty and theft of personal-use property that’s attributed to a major disaster declared by the President that occurred between Jan. 1, 2018 and Feb. 18, 2020.
You may also be able to claim an additional standard deduction if you or your spouse are blind and/or age 65+ at the end of the tax year. If you can be claimed as a dependent on someone else’s 2019 tax return, then your deduction is limited to the greater of (1) $1,100 or (2) your earned income plus $350.
Advantages to Standard Deduction
There are several distinct advantages to standard deductions vs itemized deductions. Here’s why taxpayers tend to favor the standard route.
- Convenience:The standard deduction is an automatic process and the preset amount saves you time and energy. You do not have to calculate every possible tax deduction available to you nor provide supporting documentation.
- Larger Deduction:Seniors and visually impaired taxpayers may be able to deduct a larger portion of their income with standard vs itemized deductions.
- Exceptions: You are allowed a deduction even if you have no qualifying expenses for claiming itemized deductions.
Depending on your circumstances, however, the standard deduction may not be the best option.
Disadvantages to Standard Deduction
- Limitations:You are unable to claim the standard amount if you’re married and filing separately, and your spouse itemizes his or her deductions on their tax return. You are also ineligible if you’re a nonresident alien, a dual-status alien, or filing a return for a period of less than a year. Dependents may be eligible, but their deduction might be reduced if they are claimed on someone else’s return.
- Money Loss:Depending on your financial scenario, you may be missing out on some major tax breaks by claiming the standard vs itemized deduction.
What is an Itemized Deduction?
Itemized deductions are expenses that taxpayers can claim on their tax return to decrease their taxable income. When you itemize deductions, you tally up all qualifying expenses and claim them as individual line items. If you’ve incurred a large number of tax-deductible expenses, then the total itemized amount may be larger than the standard deduction.
Here are a few qualifying examples:
- Medical expenses
• Property taxes
• Home office expenses
• Charitable contributions
• Tax preparation fees
• Job search expenses
• Casualty and theft losses
• Mortgage interest
Advantages to Itemized Deductions
It’s easier to claim the standard deduction vs itemized deduction, but there are reasons why many taxpayers still choose the latter strategy.
- More Possibilities: The IRS offers taxpayers hundreds of possible deductions. Expenses fall into a broad range of categories, so individuals may find more opportunities for saving.
- Reduced Taxes: Every itemized deduction reduces your taxable income. Some expenses, like mortgage interest and property taxes, can easily exceed the standard deduction. Itemizing them could significantly reduce your taxes and save a lot of money.
Itemizing does have its own set of disadvantages, though. Here are some cons to keep in mind.
Disadvantages to Itemized Deductions
- Paperwork:While the standard deduction is an automatic process, itemizing is the opposite. You will need to be able to document every single item because claiming false deductions is fraud. Depending on the effort required to prove evidence of your expenses, the deductions may not be worth the time it takes to compile the necessary documentation.
- Limitations:Itemized deductions may be reduced if your adjusted gross income on Form 1040 is relatively high. However, this limitation has been suspended for the tax years 2018 through 2025 under the Tax Cuts and Jobs Act.
How to Decide: Should I Itemize or Take the Standard Deduction?
At the end of the day, you should choose itemized deductions if the total is larger than the standard amount, but you’ll need to know which tax breaks you’re eligible to claim and retain supporting evidence for at least seven years after filing your return to defend yourself against an IRS audit.
If your itemized deductions are less than the standard amount, or you do not want to deal with the burden of proof, then it’s probably better to take the no-questions-asked route.
State Tax Considerations
The exception to this general rule of thumb applies to taxpayers who live in a state that does not allow itemized deductions, such as Massachusetts and Michigan. In this case, claiming the standard amount on their federal return would lead to greater savings when combined with the reduced taxation made available to them at the state level.
Community Tax professionals can help you run the numbers through both strategies so you can feel confident knowing you’ve made the best decision. We’ll look for every tax break available to you, helping to keep your hard-earned money in your pocket where it belongs. Learn more about our tax preparation services to see how we can ensure your finances are on the right track.