Standard vs Itemized Deductions & When To Use Them

adding tax deductions on a tax form

When it comes to choosing between standard versus itemized deductions, it involves simple math and understanding which deduction works best for you.

There are often mixed feelings when tax filing season arrives. For some individuals and businesses, the thought of filing a tax return isn’t so pleasant, especially when they’ve made quite a bit of money over the past year. For others, tax time is rewarding, with an expectation of a large refund. It all depends on how your income tax situation looks and the choices you make when filing your income tax return.

But before you file, one thing is for certain, it’s smart to understand all your options to receive the best possible outcome. A great deal of your outcome depends on how you add your deductions. There are two ways: The standardized deduction and the itemized deduction route. Both have positive and negative aspects.

 

What Are Tax Deductions?

A tax deduction basically lowers an individual or a company’s liability by reducing taxable income. As many organizations and individuals wait until the end of the year to settle tax debts, deductions are important for offsetting the yearly gross income.

Income that isn’t taxed during the year will come for collection when it’s time to file income tax returns. The company or individual’s work expenses must be factored into the owed taxes to calculate what’s actually due. Since purchases are acquired and bills are paid during the tax year to keep the business running, these expenses must be recorded against taxes due. This is why deductions are good news for the business.

And taxpayers have a choice in how to record deductions. You can either choose the standardized deduction, a number used as a set deduction for simplified tax purposes, or the itemized deduction, where every expense is recorded individually. One may save you more money than the other. This is important to any taxpayer at the end of the year.

 

Why Tax Codes Differ

Different tax codes are depending on the region where you live. These codes vary at the state or federal level. Tax code standards are set on an annual basis for both the federal and state governments.

The federal government often sets tax deductions in a certain way hopeful that taxpayers will get involved in bettering society through community service. There are also tax deductions for stocks as long as they are owned for investment reasons. They are counted as a realized capital loss.

Rare deduction options

Before delving into the two basic deduction types, it’s important to be aware of an uncommon deduction option for rare circumstances. A tax loss carryforward is a capital loss not included in either standardized or itemized deductions. It’s the only exemption in the tax laws. The tax loss carryforward benefits the taxpayer as earnings are rearranged and carried from previous years. As far as capital losses, you can claim $3,000. This is as of last year.

 

Standardized vs Itemized Deductions: What’s the difference?

Tax deductions, as mentioned, come in two major forms, with rare exceptions for tax loss carryforward. These two deduction options provide ways for individuals and organizations alike to discover the best way to apply their expenses to income tax returns.

Standardized Deductions

In simple terms, a standardized deduction is a set number, and itemized is a list of all individual or organizational expenses, but to grasp the concept there’s more you need to know.

Standardized deductions in the United States change from year to year and are the deductions offered to individuals by the federal government. Tax laws are also different in each state offered at the state tax level. These tax laws can also change where needed each year.

With standard deductions, there are no calculations needed as the amount is already determined. It’s usually considered the easier route, as individuals or organizations can shorten tax filing time with a set deduction. While many organizations choose the itemized route, most individual taxpayers choose the standard route.

Itemized Deductions

With itemized deductions, there’s more work, as each expense or loss is looked at individually. In this case, calculations are necessary to determine the right amount of the deduction, or square footage of some home offices, a portion of utilities, and so forth.

You can only choose the itemized deduction route if your expenses are more than the standardized allotment. The most benefit with using itemized deductions comes from numerous large expenses that are certain to add up to be more than the standard figure provided by the federal government and approved through individual state laws.

 

When to Use Standardized Deductions

If you’re confident that your deductions are less than the standardized amount allowed by the federal government, you should use the standard route. You can use one of three standardized deductions depending on your filing status. These include:

  • Married, filing jointly, or widow- $24,800
  • Married or single filing separately-$12,500
  • Head of Household-$18,650

Pros and cons of standardized deductions

Standard deductions can be used by anyone, and they’ve proven beneficial to those without mortgages or low-income families. With this deduction, there is no tracking of expenses, and no pressure to provide documentation of any kind.

 Another good thing about the standardized deduction is that some individuals qualify for larger than usual amounts, like the disabled or people of a certain age. If you are blind or over the age of 65, you qualify for an additional amount between $1,300 and $1,650. The reason for this addition is because those with disabilities or mature in age have additional medical or psychiatric needs at times. This extra deduction amount can help exponentially during tax time.

The only issue with this deduction is that you might not get as much money as the itemized deductions allotment, or there could be filing limits on your standard amount. These limits are few but important to remember.

  • If you’re married and your spouse files using itemized deductions, you cannot receive the standard deduction amount.
  • In more rare circumstances, like if you’re filing for under a year because of new citizenship, this deduction isn’t available.
  • If you’re a nonresident alien or dual citizen, you cannot get a standardized deduction either
  • And, of course, if you’ve filed on another individual’s tax returns, you cannot receive this deduction. But this is a given.

When to Use Itemized Deductions

Itemized deductions can be used in various circumstances or for certain expenses. Several situations qualify for itemized deduction according to the federal government, like retirement funds, or when you’re filing jointly with a spouse. The qualifying deductions are as follows:

  • Home mortgage interest
  • Home office expenses and other freelance work deductions
  • Recorded and calculated charitable donations
  • Non-profit organization donations
  • Religious donations such as tithes
  • Government organization payments
  • Business expenses, such as travel costs and meals
  • Networking expenses, physical and online business meetings and, etc.
  • Annual tax and sales tax on personal property like cars and homes.
  • Healthcare, Dental, prescription drugs, and medical bills
  • Property taxes

Stipulations on Itemized Deductions

There are certain limits on how much you can count on itemized deductions. A threshold is set by the federal government for these expenses. Medical expenses, for instance, must be more than a certain percent of your adjusted gross income. You cannot itemize a few prescriptions and a couple of medical bills to qualify.

As an example, last year’s expenses had to be more than 7.5 % of an individual’s AGI. If you file your income taxes, you must be aware of this year’s percentage. So, it’s best to have this information at hand before tax time arrives. If using an accountant, they are aware of this information so there’s no concern. An accountant can help you decide which deduction is best for you if you’re unsure.

Pros and cons of itemized deductions

The obvious positive aspects of itemized deductions are the numerous deductions allowed and the opportunity for a better tax refund outcome. Itemized deductions often count in your favor, decreasing or eliminating owed taxes, or even awarding a nice large refund to individuals or companies. You can save more money according to your tax bracket as well.

As lucrative as itemized deductions may seem, they do come with drawbacks. With itemized deductions, there is a large amount of paperwork to be completed. This requires tallying up expenses and gathering any needed documentation to account for each expense. It’s a manual process that takes energy and patience, even with a possible benefit in mind. Even worse, sometimes this manual work still results in a negative outcome. This is the largest drawback to using itemized deductions on tax returns.

Another downside to itemized deductions comes from The Tax Cuts and Jobs Act. This law limits state and local deductions to $10,000, even for taxes on the property. Also, If interest is taken out of home equity loans, except in cases of home renovations, this interest cannot be counted with itemized deductions. There’s a $75,000 limit on this deductible interest too.

 

Choosing Between Standardized and Itemized Deductions

It may not be easy to choose which type of deduction process you should utilize, especially if you’re on the threshold of multiple or large expenses. It’s sometimes difficult to be sure where you qualify. It’s so important to think about these options during the year and not wait until the last minute to avoid stress and frustration, even the possibility of choosing the wrong way.

If you’re not sure, seek a tax professional to help you understand your particular life situation and where you fit into the tax equation. With this information, you can effectively add your deductions and possibly save a lot of money in the long run.

 

Ozzie Gomez is a Senior Tax Settlement Agent and the owner of Innovative Tax Relief which holds business licenses in Tax Resolution, Tax Audit Representation and Tax Preparation.  With almost 10 years of experience in the tax resolution industry, he has personally helped more than 4,000 individuals and businesses resolve their tax issues.

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