While you don’t have much choice when it comes to paying taxes, there are deductions available to reduce the amount you owe Uncle Sam. Deductions shield a portion of your earnings from income tax, and they have become especially important in recent years.
Prior to the passage of the Tax Cuts and Jobs Act of 2017, taxpayers could claim an exemption of $4,050 for themselves and each of their dependents. However, those exemptions were eliminated under the act, making deductions now the prime way to reduce taxable income.
However, that wasn’t the only change. “Under TCJA, they drastically changed the standard deduction,” says Shamisa Zvoma, CPA and tax principal with accounting firm Friedman LLP in New York City.
The standard deduction is the government’s built-in subtraction that you can take while preparing your taxes. Taxpayers’ other option is to itemize deductions. Itemizing is composed of individual deductions that, together, can help lower the amount of taxable income you pay.
Read on to discover the pros and cons of a standard deduction vs. itemized deduction to decide which approach is best for you.
[READ: Your Guide to 2021 Tax Deductions.]
Standard Deduction
To compensate for the loss of personal exemptions, the standard deduction was nearly doubled for the 2018 tax year, and it has increased every year since. Depending on your tax-filing status, you are entitled to take one of the following standard deductions for the 2021 tax year:
— Single or married filing separately: $12,550.
— Head of household: $18,800.
— Married filing jointly or qualified widow(er): $25,100.
“A standard deduction is something you get on your return without doing anything else,” says Paul Joseph, a CPA and owner of Joseph & Joseph Tax & Payroll in Williamston, Michigan. With few exceptions, all taxpayers are entitled to this deduction with no strings attached.
Here are the key benefits of the standard deduction:
— It’s easy, convenient and saves time.
— Some taxpayers qualify for a bigger standard deduction.
— Anyone can claim it.
It’s easy, convenient and saves time. If you like to keep your taxes as easy as possible, opting for the standard deduction might be the wise way to go. “By default, everyone takes the standard deduction,” Zvoma says. Claiming it is essentially an automatic process that doesn’t require you to devote time or energy to tracking expenses. As a result, it saves you the trouble of providing documentation, filling out a Schedule A form or needing to understand nuances of tax law.
Some taxpayers qualify for a bigger deduction. Some individuals might be eligible for an increase in their standard deduction based on age or disability. Taxpayers who are age 65 and older or blind are entitled to an additional deduction of $1,300 if you’re married or a qualifying widow(er) and $1,650 if you’re single or head of household.
Anyone can claim it. You’ll be allowed to take a standard tax deduction even if you don’t have expenses that qualify you to make itemized deductions. “You get the deduction even if you don’t own a home or donate to charity,” says Abby Donnellan, a CPA and senior tax strategist with the CWCJ Team of financial firm Moneta.
Although the standard deduction is a simple method, it might not be the best option based on your financial situation. Here are the drawbacks of taking the standard deduction:
— Standard deductions have filing limitations.
— You might end up with a smaller deduction.
Standard deductions have filing limitations. You won’t be able to take a standard deduction in a few scenarios. For instance, if you are married but filing separately, you may not be able to take the standard deduction if your spouse itemizes. The same is true if you are claimed as a dependent on someone else’s return. Though not as common, if you’re a nonresident alien, a dual-status alien or someone who is filing a tax return for a period of less than a year, then you won’t be eligible for the standard deduction either.
You might end up with a smaller deduction. The standard deduction amount might be lower than the amount you could deduct if you itemize. For example, the standard deduction might be less than the total amount of mortgage interest, real estate taxes and charitable contributions you’ve paid and could deduct.
[READ: 12 Tax Deductions That Have Disappeared.]
Itemized Deductions
Unlike the standard deduction, itemized deductions can result in a different amount for each taxpayer. Itemized deductions are claimed on a Schedule A form and are broken down into five main categories:
— Medical and dental expenses.
— Taxes you paid.
— Interest you paid.
— Gifts to charity.
— Casualty and theft losses.
Taxpayers can also include other itemized deductions that result from less common situations such as gambling losses and certain unrecovered investments in a pension. Prior to the passage of the Tax Cuts and Jobs Act, workers could also itemize their unreimbursed expenses, but that is no longer the case. “That’s all gone now and that has hurt (taxpayers’ ability) to itemize deductions,” Joseph says.
Here are the benefits of itemized deductions:
— You can claim more expenses.
— You can save more money in taxes.
You can claim more expenses. Mortgage interest, property taxes and medical bills are just a few of the expenses allowed with itemization. While some of these categories have caps or limitations, taxpayers with large mortgages who give generously to charity may find they get a larger deduction by itemizing.
You can save more money. Because you can include more deductions when itemizing, you might stand to earn a larger tax refund. The amount itemizing saves you will depend on your tax bracket. For instance, income taxed in the 24% tax bracket will see a 24 cent tax savings for every dollar itemized above the standard deduction. “Ideally, you’ll want to be in a situation where you’re itemizing,” Zvoma says.
Itemizing deductions comes with some drawbacks, however. Here are the disadvantages of itemized deductions:
— It takes more paperwork and effort to itemize.
— There are restrictions on some itemized deductions.
[Read: Tax-Filing in 2022: What’s My Tax Bracket?]
It takes more paperwork and effort to itemize. Unlike standard deductions, itemizing is a manual process that requires gathering documentation and tallying expenses. Depending on how good your records are and the amount of your deductions, this time-consuming process might not reduce your taxable income enough to make it worth the effort. To determine whether itemizing is worthwhile, consider how much you pay in mortgage interest, charitable gifts and state and local taxes.
There are restrictions on some itemized deductions. The Tax Cuts and Jobs Act caps the itemized deduction for state and local taxes, including property taxes, at $10,000. What’s more, interest on home equity loans taken out for purposes other than a renovation are no longer deductible, and only interest on the first $750,000 of a new mortgage can be included. If you want to deduct medical and dental expenses, only those in excess of 7.5% of your adjusted gross income are eligible to be itemized. “A lot of people come in thinking they are going to get medical deductions,” Donnellan says, but unless someone has very high expenses or a very low income, that is unlikely.
When to Itemize vs. Take the Standard Deduction
Anyone with deductible expenses that exceed the standard deduction should itemize. For most people, that means having mortgage interest or property taxes to deduct. However, even owning a home is no guarantee someone will be able to itemize.
“You have to keep in mind that one of the biggest deductions is the (state and local) taxes you pay and that’s limited to $10,000,” Joseph says. Unless someone has significant charitable gifts or a major medical event, it may be difficult to find enough deductions to itemize.
However, even if you can’t itemize, Donnellan reminds people the government is allowing a $300 above-the-line deduction for cash charitable gifts made in 2021. This allows married couples filing jointly to deduct up to $600 on their 2021 tax return even if they don’t file a Schedule A form for itemization.
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The Pros and Cons of Standard vs. Itemized Tax Deductions originally appeared on usnews.com
Update 02/22/22: This story was published at an earlier date and has been updated with new information.
