What are standard and itemized tax deductions?
The standard deduction is a dollar amount set by the IRS that reduces the amount of income that you are taxed on. This dollar amount is determined by taxpayer status, age, and blindness. The standard deduction amounts are listed below:
Who can’t claim the standard deduction?
There are some taxpayers that are not eligible to claim the standard deduction therefore, their income is not reduced and the full AGI is taxable. These taxpayers are listed below
A married taxpayer whose spouse is filing MFS and has chosen to take the itemized deduction.
An individual who was a nonresident alien or dual status alien during the tax year. The following are exceptions:
A nonresident alien filing a MFJ return with a US citizen
A nonresident alien that becomes a citizen by the end of the year or files a MFJ return with a US citizen and asks to be treated as a US citizen all year
Students/Business apprentices that are residents from India
The itemized deduction uses the actual amount of valid tax deductions found on Schedule A to reduce the amount of income that is subject to federal tax. These deductions are categorized as followed:
Medical and Dental Expenses (amount above 7.5% of AGI)
Taxes Paid (capped at $10,000)
Interest Paid
Gifts to Charity (limits vary)
Casualty and Theft Loss
Other
Gambling Losses
Casualty and Theft Loss of Income Producing Property
Federal Estate Tax
Amortizable Bond Premium
Ordinary loss due to debt instrument
Repayment of amounts due to rights
Unrecovered investment in pension
Impairment related work expenses
How does standard/itemized deductions work?
Both Standard and Itemized deductions work the same in that they are used to reduce the taxable income.
For example, if an individual has a total adjusted gross income of $100,000 and has a standard deduction of $13,850 then they will be taxed on $86,150 at your marginal tax rate. If the same taxpayer chooses to use itemized deductions instead of standard deductions then the $100,000 AGI will be decreased by the total amount of itemized deductions.
Can I deduct more than the standard deduction?
If you choose to take the standard deduction the only way to deduct more is to take advantage of other deductions that you qualify for such as child tax credit or earned income tax credit.
However, a taxpayer is not able to deduct any of the deductions found within the itemized deductions category if they choose to use the standard deduction. For example, a taxpayer that uses the standard deduction is not eligible to claim a charitable contribution deduction at the federal level and should ask their tax professional if there are state level charitable contribution tax deductions available. In Colorado you are able to deduct charitable contributions at the state level.
When should I use the standard deduction or itemized deductions?
A taxpayer should choose to use whichever deduction provides them with the greatest reduction in taxable income.
For example, if the taxpayer with an AGI of $100,000 is eligible for a standard deduction of $13,850 but has medical expenses of $15,000, charitable contributions of $ 10,000, taxes paid of $5,000 bringing their total itemized deduction to $22,500. The taxpayer in this example should itemize because their taxable income would be $77,500 compared to the taxable income of $86,150 if the taxpayer used the standard deduction
Proof is a key when using itemized deductions, if there are any questions raised by the IRS or state taxing authorities as to the deductibility of deductions claimed you must provide proof of expenses paid by the taxpayer. If you need help with representation be sure to schedule a free consultation.
Standard v Itemized
Which deduction you choose should be based on your personal situation. Standard deductions are often chosen because they are easier and require no proof to claim this deduction unless you have a special circumstance. Individuals who don’t want to manage receipts, appraisal reports, or have limited expenses often claim the standard deduction. Taxpayers that keep meticulous records, have large expenses, give large amounts to charity that lead to a deduction larger than the standard deduction often claim the itemized deduction and save more money in taxes. Itemized is worth it if you know how to tax plan and maintain records because itemized deductions can exceed standard deductions.
What can’t I deduct if I use the standard deduction?
If a taxpayer chooses standard deduction they can’t claim the mortgage interest deduction, state and local taxes, charitable contributions deduction, medical and dental expenses, or casualty/ theft losses.
Whatever your choice, it is best to work closely with your tax professional not only because they are aware of your situation but they can advise you of the best choice to make that will align most closely with your personal financial goals for the year to come.
If you are looking for a new tax professional be sure to schedule a free consultation today.
