There are two ways to lower your federal income tax by reducing your taxable income: take the standard deduction or itemize deductions.
- Standard deduction: The standard deduction amount, which was increased by the Tax Cuts and Jobs Act of 2017, is different for each filing status and is higher for blind taxpayers and those who are age 65 or older. The amounts are also adjusted for inflation each year.
- Itemized deductions: Itemizing your deductions lets you deduct certain eligible expenditures from the tax year, such as medical expenses, mortgage interest, real estate and personal property taxes, and charitable contributions. You must fill out a Schedule A form to itemize your deductions.
How itemized deductions work
When you choose to itemize, there are a few things to keep in mind. First, not every dollar you spend can be subtracted from your income. In the medical and dental deduction category, for example, only expenses that exceed 7.5 percent of your adjusted gross income (or AGI) can be deducted. If you didn’t spend that much, then none of your medical costs are deductible.
There also are restrictions on how much you can deduct for casualty losses suffered in a federally declared disaster, as well as limits on the deductibility of very large charitable contribution amounts.
Finally, recent tax law changes placed new limits on the mortgage interest deduction. Interest may only be deducted on mortgage debt up to $750,000. However, the limit remains at $1 million if your loan was originated before December 16, 2017. Home equity loan interest may only now be used as an itemized deduction if the loan funds were used to buy, build, or improve your home.
Pros of itemized deductions
- You can claim more expenses that you wouldn’t be able to if you claimed the standard deduction.
- Depending on your financial situation, itemizing may allow you to shield more income from taxes and lower your overall tax bill.
Cons of itemized deductions
- Itemizing deductions requires more paperwork, filling out Form 1040 Schedule A and keeping records of those expenditures in case you get audited.
- While there are plenty of opportunities to itemize, each category has its own rules and limitations of how much can be deducted.
- Not everyone will save money on their tax bill by itemizing — some people will be better off taking the standard deduction.
How standard deductions work
The difference between a standard deduction vs. itemized is that a standard deduction is a flat dollar amount determined by the IRS that requires less paperwork and record keeping. And for many taxpayers, the standard deduction is higher than your itemized deduction would be — which means you’ll save more on your taxes.
Your standard deduction amount depends on your taxpayer filing status.
2021 tax return standard deductions
| Filing status | Standard deduction amount |
|---|
| Single filers or married couples filing separately | $12,550 |
| Head of household | $18,800 |
| Married couples filing jointly | $25,100 |
Some older and visually impaired taxpayers may be able to cut their tax bills with even larger standard deduction amounts by simply checking a couple of boxes on their tax returns.
That means the standard deduction might now be appealing to even more taxpayers.
Remember, you always want to use the deduction method that gives you the biggest tax advantage.
So, if all those receipts you stashed last year in the hopes of turning them into tax breaks add up to less than your standard deduction amount, throw them away. There’s no need to waste your time filling out extra forms.
Pros of using the standard deduction
- There are no limits as to who can claim a standard deduction. Every taxpayer is eligible.
- You’ll save a lot of time and energy by not having to fill out the Schedule A form used to itemize deductions.
- If you use a professional tax preparer, you could save an average of $100 on your fees by using the standard deduction.
- You could potentially qualify for a higher deduction when you opt out of itemizing. An estimated 90 percent of American households opt for the standard deduction when filing taxes each year.
Cons of using the standard deduction
- You may leave money on the table by using the standard deduction rather than itemizing. It may be worth analyzing your expenses each year to make sure you pick the right option.
- There may be some situations where you can’t claim the standard deduction, such as if you’re married filing separately and your spouse itemizes their deductions.
Learn more:
- Tax brackets
- Standard deduction amounts
- Take advantage of the sales tax deduction
FAQs
You should itemize deductions on Schedule A (Form 1040), Itemized Deductions if the total amount of your allowable itemized deductions is greater than your standard deduction or if you must itemize deductions because you can't use the standard deduction.
Why would someone choose to itemize their deductions rather than use the standard deduction? ›
Some taxpayers choose to itemize their deductions if their allowable itemized deductions total is greater than their standard deduction. Other taxpayers must itemize deductions because they aren't entitled to use the standard deduction.
What percentage of people take standard deduction? ›
The standard deduction is a flat adjustment to your adjusted gross income, and is what most Americans take when filing their taxes. In the 2019 tax year, 87.3% of Americans took the standard deduction, according to data from the IRS.
Can you choose to take both the standard deduction and itemized deductions? ›
The standard deduction lowers your income by one fixed amount. On the other hand, itemized deductions are made up of a list of eligible expenses. You can claim whichever deduction reduces your tax bill the most. You are not allowed to claim both.
What is one disadvantage of itemizing your 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.
What qualifies for itemized deductions? ›
Itemized deductions are expenses the taxpayer incurred, such as mortgage interest, state or local income taxes, property taxes, medical or dental expenses, or charitable donations.
Why is the standard deduction so high? ›
Note: The IRS adjusts the standard deduction annually for inflation. So, that's why your 2023 standard deduction is higher than it was for the 2022 tax year. (You can see how that works in the charts for 2023 compared to 2024 below).
How should you choose between taking the standard deduction and itemizing deductions quizlet? ›
how should you choose between taking the standard deduction and itemizing deductions? any interest paid on home mortgages, contribution to charity, and taxes paid to other agencies. find the sum of your deductible expenditures. if the sum is greater than your standard deductions, you should choose itemized deductions.
What expenses can you itemize? ›
If you itemize, you can deduct these expenses:
- Bad debts.
- Canceled debt on home.
- Capital losses.
- Donations to charity.
- Gains from sale of your home.
- Gambling losses.
- Home mortgage interest.
- Income, sales, real estate and personal property taxes.
Certain taxpayers aren't entitled to the standard deduction: You are a married individual filing as married filing separately whose spouse itemizes deductions. You are an individual who was a nonresident alien or dual status alien during the year (see below for certain exceptions)
If your standard deduction is less than your itemized deductions, you probably should itemize and save money. If your standard deduction is more than your itemized deductions, it might be worth it to take the standard and save some time.
What are the cons of the standard deduction? ›
Standard deductions have filing limitations.
You won't be able to take a standard deduction in a few scenarios. For instance, if you are married but filing separately, you may not be able to take the standard deduction if your spouse itemizes. The same is true if you are claimed as a dependent on someone else's return.
Can you deduct mortgage interest if you take the standard deduction? ›
The IRS may let you deduct interest paid on your mortgage on your federal income tax return. To claim this deduction, you need to itemize — you cannot take the standard deduction.
Are there any deductions you can take without itemizing? ›
To reap the benefits of deductions without the hassle of itemization, Backman notes you'll need line items that fall into these categories — contributions to your IRA, contributions to your HSA (health savings account), expenses you incur as a teacher like purchasing classroom supplies, and interest on student loans.
What is an itemized deduction example? ›
Some examples include employment taxes, federal income taxes, and license fees. No deduction is allowed for foreign property taxes unless it relates to a trade or business or for the production of income.
How do I change from itemized to standard deduction on Turbotax? ›
Select Deductions & Credits. When asked how you want to enter your deductions and credits, select I'll choose what I work on. Scroll all the way to the bottom of the Your 2023 Deductions & Credits screen and select Done with Deductions. Continue until you see The Standard [or Itemized] Deduction is Right for You!
What does the W-2 form tell you? ›
A W-2 tax form shows important information about the income you've earned from your employer, amount of taxes withheld from your paycheck, benefits provided and other information for the year. You use this form to file your federal and state taxes.
