It’s tax season again. That means you’ll need to decide whether to use the standard deduction or itemized deductions when completing your taxes this year. Although the decision may be easy for some, there are many things to consider before you determine which is best for you.
Standard Deduction Overview
The Tax Cuts and Jobs Act (TCJA) of 2017 made significant changes to the individual income tax, including the elimination of personal exemptions. To compensate, the standard deduction was nearly doubled for the 2018 tax year. For tax years 2019 through 2021, the standard deduction amount will be adjusted to a slightly higher amount from the previous tax year.
For the 2020 tax year, the standard deduction is as follows:
- Single or Married Filing Separately – $12,400
- Married Filing Jointly – $24,800
- Head of Household – $18,650
Next year, the standard deduction for the 2021 tax year will be:
- Single or Married Filing Separately – $12,550
- Married Filing Jointly – $25,100
- Head of Household – $18,800
Taxpayers who are 65 years or older or blind, however, receive additional deduction amounts above the standard deduction offered to most taxpayers. Here are the amounts for the 2020 tax year.
Most taxpayers are eligible to take the standard deduction, but there are a few exceptions. If you are married and file separately, you may not use the standard deduction if your partner opts for itemized deductions. You are also ineligible if you’re filing as an estate, common trust fund, or a partnership. Non-resident aliens or dual-status aliens who are filing for a period of less than 12 months are also ineligible. If you are claimed as a dependent on someone else’s tax return, your deduction may also be limited.
Why Choose The Standard Deduction?
There are many reasons why the standard deduction is a popular choice with taxpayers. The most obvious is how easy it is to use. You don’t have to add up receipts or track expenses. You just simply plug in the number associated with your filing status. That also saves you time and reduces your chances of raising a red flag with the IRS. For the elderly or those who are blind, it generally provides for a larger tax deduction, as well.
Itemized Deductions Overview
Taking the standard deduction may seem like the easy choice, but it may not provide the biggest benefit when it comes to reducing your taxable income. By itemizing deductions, you may actually maximize your tax benefits. Unlike the standard deduction, you are not limited to a specific amount when you itemize. Of course, you’ll need to do a little math to determine which method gives you the largest deduction.
Some of the expenses typically included with itemized deductions include:
- Charitable contributions
- Medical and/or dental expenses
- Investment interest
- Mortgage points and interest
- State and local taxes (sales and/or property taxes)
- Business expenses
- Casualty, disaster, or theft losses
- Gambling losses (equal to or less than the amount won)
Unfortunately, deductions for tax preparation fees and most unreimbursed employee expenses are no longer eligible. Interest on home equity loans or lines of credit that are used for things other than buying, building, or improving your home is also ineligible.
If you choose to itemize, you must list all qualifying deductible expenses on Schedule A. Keep in mind that you will need to substantiate your deductions by providing proof, such as a receipt or bank record.
Itemized Deductions Pros & Cons
There are many pros and cons when it comes to itemizing deductions. The main benefit, of course, is the ability to deduct a higher amount than you would under the standard deduction. Those who give generously to charity, have large mortgages, or high medical expenses generally benefit from itemizing. In some cases, itemized deductions can also lead to a larger tax refund.
On the flip side, the cons include more time and effort, as well as certain caps and restrictions on certain deductions. When you choose to itemize, you’ll also need to keep detailed records and receipts. Be sure to keep these items for at least six years, just in case you are audited. If you don’t have them readily available, talk to a tax professional before hunting them down. You don’t want to waste precious time and energy just to find out that it won’t benefit you in the end.
Deciding whether to use the standard deduction or itemized deductions is a personal choice. You should carefully weigh the pros and cons of each, and crunch the numbers to determine which has the most tax benefits. Although most taxpayers will ultimately choose the standard deduction, the time and effort using itemized deductions may pay off for you in the end. It’s also a good idea to consult a tax expert, like those at Tax Defense Network, to ensure you are taking advantage of all tax credits and deductions available to you. To schedule your free consultation, call 833-803-4222 today!