Tax day is tomorrow! If you are like one of the millions of Americans scrambling to get your taxes in before the deadline, you may have come across questions about itemizing your deduction versus taking the standard deduction. While this is certainly accounting jargon, it is a simple yet important concept to understand.
If you are doing your taxes today or preparing for another year, here is everything you need to know about the standard deduction or itemizing.
What is the standard deduction?
When filing your taxes, a deduction is an item that lowers your taxable income. Popular income tax deductions include the mortgage interest deduction, student loan interest deduction, and charitable contributions. Deductions should not be confused with credits, like the child tax credit, that lowers your tax bill directly. Deductions lower your taxable income, and your taxes as a result, where credits lower your taxes due dollar for dollar.
The government gives every American that files income taxes an option to take a standard deduction. For 2016, the standard deduction is $6,300 for individuals, $12,600 for married couples filing jointly, and $9,300 for head of household filers. For 2017, the standard deduction increased by $50 for individuals and $100 for those married filing jointly.
To put this into practice, let’s look at an example. If you earn $50,000 per year and are single, taking the standard deduction means you only pay taxes on $43,700 of income. That is roughly a $1,575 tax savings. For a married couple that earns $100,000 per year combined, the standard deduction means they only pay taxes as if they earned $87,400. That is roughly a $3,150 tax savings. But in some cases you can save even more by forgoing the standard deduction. To do so, many filers take advantage of itemized deductions.
What does it mean to itemize your deductions?
The IRS gives you two options to handle deductions on your tax return: you can either itemize or you can take the standard deduction. If you take the standard deduction, you are guaranteed a specific income deduction to lower your taxes. If you itemize, the total you can deduct is unique to your taxes.
Some deductions, including the popular and previously mentioned mortgage interest tax deduction, have to be itemized to qualify for a deduction. This means that for itemized deductions, you have to add up everything and use that total on your taxes instead of the standard deduction. But knowing which to choose is not always so simple.
Choosing between itemized and standard deductions
Deciding between the standard deduction and itemized deduction depends on how your money moved over the past year. As a general rule, most people will not itemize unless they own a home and can claim the mortgage interest deduction. Without that, it is unlikely to have more itemized deductions than the standard deduction allows. Personally, I have only ever been able to itemize once and used the standard deduction every other time I have filed my taxes, which includes 17 years of tax returns.
Some common itemized tax deductions include:
- Mortgage interest
- Charitable donations
- State and local taxes
- Tax preparation expenses
- Medical and dental costs
- Unreimbursed work related expenses
- Expenses related to finding a new job
- Moving expenses when you move at least 50 miles for a job
Get the official list of possible deductions from the IRS at the official page here. If you add up your itemized deductions and they are lower than the standard deduction, you are best off taking the standard deduction. If your itemized deductions are higher, go with the itemized deduction.
Calculate your best option every year
Your personal finances change every year, and so do your taxes. If you have simple taxes and do not own a home or make large charitable contributions, you are likely going to use the deduction most years. However, you never know for sure until you do the math, and it would be a shame to leave free money on the table!
Congress and the IRS have made our tax code incredibly complicated. According to the Washington Examiner, the current tax code is a whopping 74,608 pages long! With that massive volume of complex information behind our tax system, there is a clear reason why taxes are so challenging. Do your best to take as many deductions as possible to minimize your tax bill to the IRS!