Every taxpayer with a filing requirement is allowed a Standard Deduction, which depends on their filing status. The Standard Deduction is the first step in reducing adjusted gross income (Form 1040, line 38) to taxable income (Form 1040, line 43). The other is the Exemption amounts (Form 1040, line 42).
But the IRS wants you to pay the lowest legitimate tax possible, so you can opt to itemize your deductions, which is done on Schedule A. You can choose to use itemized deductions, rather than the standard deduction, if by itemizing you have less taxable income and, therefore, a lower tax liability.
For most taxpayers, the amount of the standard deduction and the itemized deduction are different. Typically, your tax preparation software, accountant, or tax preparer determines which will give you the lowest tax bill. However, understanding the difference yourself – particularly what types of expenses you can deduct on Schedule A – can help you maximize those deductions and make for better planning and documentation choices throughout the year to reduce your taxes.
Here’s everything you need to know about choosing between the standard deduction and itemizing your tax deductions. For help with other issues, check out our complete Tax Guide.
What Is a Tax Deduction?
A tax deduction refers to any amounts that you are eligible to subtract from your yearly income to determine the amount of income subject to taxes. All deductions reduce your taxable income, thus lowering the total amount that you owe to the government.
There are some deductions, known as “above the line deductions” (due to where they are input on Form 1040), that can be taken regardless of whether you itemize or take the standard deduction. Examples of these include the deductions for IRA contributions, student loan interest, and moving expenses.
However, there are a range of other deductions – known as “below the line deductions” – that you can take only if you itemize. Examples of these include deductions for charitable contributions, home mortgage interest, real estate taxes, and job expenses.
The Standard Deduction
The standard deduction is a set amount that you are allowed to take based on your filing status and age. Standard deductions make filing taxes simpler because you don’t have to file Schedule A or retain documentation to support taking the standard deduction.
For 2016 taxes, the general standard deductions are:
- $6,300 if filing as single or married filing separately
- $9,300 if filing as head of household
- $12,600 if filing married filing jointly or qualifying widow(er)
However, your standard deduction will increase if you are 65 or older or blind, or if your spouse is 65 or older or blind. If any of these situations apply, you need to reference the “Standard Deduction Chart for People Who Were Born Before January 2, 1952, or Were Blind.” If you or your spouse can be claimed as a dependent by someone else, you need to complete the “Standard Deduction Worksheet for Dependents.” Both can be found in the Form 1040 Instructions.
Exceptions to Taking the Standard Deduction
You cannot take a standard deduction in these two circumstances:
- If you’re married, filing a separate return, and your spouse itemizes his or her deductions, you cannot take the standard deduction.
- If you’re a non-resident alien, or a dual status alien during any part of the year, you generally cannot take the standard deduction. Check out Publication 519, the U.S. Tax Guide for Aliens, for more specifics.
If you’re carrying a mortgage, paying for college, or making large charitable donations, itemizing your deductions on Schedule A may be more lucrative than taking the standard deduction. Though itemization requires additional work, it is often well worth the amount of money you can save, especially if you have large deductible expenses. Budgeting tools such as Mint.com can make tracking these expenses easier and can automatically transfer them to some tax preparation programs, such as TurboTax.
Common Expenses You Can Deduct on Schedule A
- Medical and Dental Expenses. If you paid for medical or dental expenses and weren’t reimbursed, you can deduct the amount that exceeds 10% of your adjusted gross income (7.5% if age 65 or older). For a detailed list of what you can and cannot include, check out the list in Publication 502.
- Taxes Paid. You can deduct either state income tax that you’ve paid (including the amount of state withholding for the year) or sales tax paid for the year. You can also deduct real estate taxes and foreign taxes.
- Home Mortgage Interest and Points. You can deduct the interest on the mortgage for your primary residence as long as your mortgage acquisition debt does not exceed $1 million or your home equity debt does not exceed $100,000. You can deduct points for the year in which they were paid if you meet certain criteria. If not, they may be deducted over the life of the loan.
- Charitable Gifts. You can deduct gifts of cash, goods, stock, bonds, or other items to IRS-qualified charities. Be sure to confirm that the charity is IRS-qualified, and retain documentation that supports your deductions in case of an audit.
- Casualty and Theft Losses. If you took a financial hit from theft, vandalism, or an act of nature to your home, vehicles, or household items, you may be able to deduct the loss.
- Miscellaneous Deductions Subject to the 2% Limit. Such expenses include unreimbursed employee expenses, tax preparation fees, and investment expenses. You can deduct the amount of these expenses that exceed 2% of your AGI. For a complete list of expenses you can deduct subject to the 2% threshold, see IRS Publication 529.
- Miscellaneous Deductions Not Subject to the 2% Limit. These include gambling losses (up to the amount of any winnings), losses from Ponzi-type investment schemes, amortizable premiums on taxable bonds, and unrecovered investment in an annuity, among others. For a complete list, see IRS Publication 529.
How to Decide
The most important thing to understand about the standard and itemized deductions is that you can only use one of them. It’s a choice, not a combination. If you want to take the standard deduction, you can’t also use Schedule A to itemize individual deductions, such as the value of donations you made to Goodwill. It comes down to whether all of your itemized deductions exceed the amount of the standard deduction you’re allowed to take based on filing status and age.
For example, many people who can’t take advantage of the home mortgage interest deduction use the standard deduction. However, even if you don’t own a home, it still pays to run the numbers to see whether itemizing or taking the standard deduction works best.
Once you’ve filled out Schedule A and determined which method to use, applying your deduction is simple. On line 40 of your 1040 tax form, you enter either your standard deduction or the total from Schedule A. If you’re using tax prep software, the program enters it for you.
Tax Deduction Tips
Whether you take the standard deduction or itemize your deductions, there are a number of things you should do to simplify the process and make it more accurate:
- If you’re filing as married filing separately, both you and your spouse must use the same deduction method. You can’t use an itemized deduction if your spouse uses the standard deduction, or vice versa. If you try to test the IRS on this rule, it will reject both of your returns.
- If you choose to take the standard deduction, you can still take above the line deductions, as well as tax credits. Tax credits are different than deductions, as they reduce the amount of tax you owe – dollar for dollar – as opposed to the amount of income you’re taxed on, and are therefore more valuable.
- Keep in mind the range of expenses you can deduct throughout the year to take advantage of tax saving opportunities as they arise. For example, if you find it tedious to have a garage sale for your unwanted items, you may opt to donate those items to a qualified charity and claim the tax break.
- You can “front load” expenses, such as paying next year’s tuition this year or scheduling medical procedures before December 31st, to maximize these deductions. It makes sense to do this during high-income years. An accountant can help you plan when to make major purchases and sales in order to maximize tax benefits.
Tax Preparation Options
You have several options available when it comes to resources to help you with your decision and the process of itemizing. Whether you try to take it on yourself or work with an expert depends on your comfort level.
1. Do It Yourself
Online filing is a low-cost and useful option and is especially helpful in subsequent years since many tax services, including TurboTax, H&R Block, and TaxACT, remember all of your information and tax results from the previous year. However, if you have a more complicated tax situation – for instance, if you own one or more rental properties or have a small business – you may want to consider professional help in order not to overlook any deductions. If your AGI is $62,000 or less, you can file your federal return free of charge with a range of tax prep programs.
Also, the IRS allows you to file online free of charge with fillable forms, regardless of your income. This service may make the most sense for you if you are comfortable filling forms out directly, searching the IRS.gov site for answers and information, and don’t mind using separate tax prep software to file state taxes. Check with your state for free file options as well.
2. Use a Tax Preparer
Having a professional handle your taxes is often prudent, especially if you have a complex tax situation or life events mean there will be something new and unfamiliar in your return, such as moving expenses or needing to file two part-year state returns. An independent tax preparer can offer you more personalized service and attention. You may also want to try one of the major tax preparation companies, including H&R Block, Liberty Tax, and Jackson-Hewitt, though they are often more expensive than independent preparers.
Keep in mind that hiring a tax preparer is significantly more expensive than filing your own taxes, and sometimes, aside from freeing up your time, the benefit is negligible. However, the confidence and peace of mind of knowing your return has been accurately prepared, and of having a counselor and advocate who knows your tax history, is worth the price for professional preparation. And remember, If you itemize, you can deduct tax preparation fees subject to the 2% AGI limit as a miscellaneous deduction.
Recent changes have increased taxes for many taxpayers, and it’s not unlikely that we will be subject to additional taxation in the future. Understanding which items you can deduct and planning accordingly could potentially reduce your tax liability by hundreds or thousands of dollars, depending on your tax bracket and the number and amount of deductions you claim.
In addition to deductions, take advantage of tax credits wherever you can, and utilize tax-advantaged accounts, such as an FSA, HSA, or IRA to pay for childcare, pay for healthcare, or save for retirement, respectively. Take time to review Form 1040, as well as Schedule A, to get a sense of the deductions you can claim, and don’t hesitate to visit IRS.gov for more information.
For help with other issues this year, check out our complete Tax Guide.
Do you usually itemize or take the standard deduction? How has your situation this year affected your decision?