The standard deduction is a specific amount decided upon by the Internal Revenue Service (IRS) each year to help lower the taxable income of taxpayers. This amount helps reduce the total of your tax bill each year.
While the majority of people take the standard deduction when they file their annual tax returns, there are still many taxpayers who itemize their tax deductions. Itemizing your deductions means that you take your qualified tax deductions and use that total to reduce your taxable income.
Examples of itemized deductions include the medical expense deduction, the home office deduction, and many other tax deductions.
Itemizing can be a beneficial route to take if you have many itemized deductions that add up to an amount that is greater than the standard deduction, but you can only choose one – either the standard deduction or itemized deductions.
What is the Standard Deduction?
The standard deduction is a certain amount specified by the Internal Revenue Service (IRS) each year – an amount that reduces your taxable income.
Your taxable income is your salaries, tips, bonuses, and other wages, which you will be taxed on. Most income is considered to be taxable unless otherwise specified by the IRS.
- Read more on the Top Sources of Taxable Income
- Read more on the Top Sources of Nontaxable Income
According to the IRS, the standard deduction is a dollar amount that reduces your taxable income. Typically, this amount varies from year to year due to inflation adjustments.
- Standard Deduction 2019: $12,200 for most taxpayers
- Standard Deduction 2020: $12,400 for most taxpayers
For the tax year of 2019, the standard deduction for single taxpayers and those who were married filing separate tax returns was $12,200. Married taxpayers and qualifying surviving spouses were able to take the standard deduction of $24,400 in 2019. For those who qualified to be the head of household, the standard deduction in 2019 was $18,350.
For the tax year of 2020, the standard deduction amount went up a little bit. The amount for single filers and those who are married filing separate tax returns is $12,400, an increase of $200 from the year before. For married taxpayers who are filing joint tax returns and qualifying surviving spouses, the standard deduction is $24,800. Head of household filers are allowed to take $18,650 for their standard deduction for the tax year 2020.
Remember that the standard deduction allows you a fixed dollar amount to use as a deduction instead of itemizing your deductions. Make sure you use the right tax rates when calculating your taxes. The last thing you want is a tax audit, which would require you to have every single document that backs up any tax credits or tax deductions you take.
- Read more on Tax Credits and how they can help reduce your tax bill.
- Read more about what documents you need to have ready for tax purposes.
- Be prepared in the event of a tax audit with our Complete Survival Guide to Audits.
Tax deductions are quite different from tax credits. Tax credits reduce your tax bill dollar by dollar; tax deductions reduce your taxable income. If you take a refundable tax credit, you might be eligible for a tax refund! Tax deductions do not help with refunds.
Standard vs. Itemized Deductions
If you choose to take the standard deduction provided for the tax year, you cannot itemize deductions. You must choose between the two. If you have enough itemized deductions to make it worth it, go ahead and itemize. You are not required to take the standard tax deduction, but most people do.
Not only is taking the standard deduction much easier than itemizing, but it is also usually more beneficial in monetary ways. Typically, the amount you can take with the standard deduction is greater than the total amount of your itemized deductions. However, this does vary from one taxpayer to another because each tax situation is unique.
Some people have a lot of medical expenses, so their medical expense deduction is a large amount – perhaps more than the amount of the standard deduction for the year. The amount of the standard deduction that you can take depends on your filing status, too.
An Example of the Standard Deduction vs. Itemized Deductions
In 2020, Jane had $11,000 in office supply and product creation expenses with her new business as a sole proprietor. Jane needed all of the supplies to get her business up and running. She adopted a side hustle and made so much extra money on the side that she decided to start her own business and extra money that way!
Her new business allowed her to take a portion of her business expenses regarding her internet, computer software, travel, cellular phone, and other qualifying expenses. Remember that these expenses must be business-related – ordinary expenses that other people in her industry incurred. The total of her business-related expenses was $623.
Jane also had qualified medical expenses, which totaled $745. This included hospital bills and medications – all of which she qualified for. Her total itemized deductions would be calculated as:
Office Expenses – $11,000
Business Expenses – $623
Medical Expenses – $745
Total Itemized Deductions – $12,367
Jane is a single taxpayer, so her standard deduction would be $12,400. This means that it is more beneficial for her to not itemize. Instead, she should take the standard deduction of $12,400 since it is greater than $12,367.
- Jane should take the standard deduction of $12,400 for the 2020 tax year.
If she later found another expense that she forgot to include that was greater than the difference here ($32.00), she would perhaps want to itemize her deductions. The expense would need to be a qualified one that is related to a deduction, which is part of itemized deductions. Also, since itemizing is complicated, if it’s only slightly above the standard deduction, you may still want to take the standard deduction.
If you do decide to itemize, you should work with a qualified tax professional – someone who understands the tax laws and the latest rules and regulations.
It’s important to note that when you itemize your deductions that you keep excellent records. For example, Jane needs to have a good mileage log to record all of her travel expenses related to her vehicle. This way, if she were to get audited, she would have proof of the tax deductions she took on her annual tax return. It’s also a good idea to keep any income statements related to your business.
Frequently Asked Questions
What is the standard deduction for 2019 taxes?
The standard deduction for 2019 was $12,200 for single taxpayers, and it was $24,400 for married taxpayers who filed a joint tax return. For those who were eligible for the Head of Household filing status, the standard deduction was $18,350. Qualified surviving spouses were also eligible for $24,400 for the 2019 tax year.
What is the maximum credit I can take on my tax return?
Some people are able to take tax credits, while others are eligible for certain tax deductions. Many taxpayers can take both tax credits and tax deductions; it really depends on your tax situation. You are eligible to take the maximum credit if you qualify for it.
Should I itemize or take the standard deduction?
You should itemize if your total itemized deductions were greater than the amount of the standard deduction you were eligible for – based on your filing status, of course. If you do not have many deductions to take, you are probably better off taking the standard deduction.
What is the Tax Cuts and Jobs Act of 2017?
The Tax Cuts and Jobs Act of 2017 made significant changes for those filing individual tax returns. It increased the amount of the standard deduction and imposed new limitations on those claiming itemized deductions. Income tax rates were also reduced as part of this tax law.
Should I claim the standard deduction this tax year?
You should take the standard deduction if the amount (based on your filing status) is greater than the amount of your itemized deductions. Itemized deductions include the medical expense deduction, the home office deduction, and many more.
Are you wondering if you should take the standard deduction? Do you think you may have more itemized deductions that will make it more beneficial for you to go that route? Are you unsure about which way will give you the best results?
If you need help filing your tax return or have tax questions, reach out to a qualified tax consultant. There are many types of tax professionals available, so make sure you work with someone who is reputable and knowledgeable about tax laws and the proper way to complete your tax return.
A tax accountant or enrolled agent can help you prepare your taxes and represent you in the event of an audit. You want someone by your side who will be able to help you in the best way possible when you file your taxes.
We offer many services and assistance for small business owners and taxpayers, so schedule a free tax consultation today to see how we can help you resolve any tax issues you may have, represent you in the event of an audit, or offer you business advice regarding financial planning. We even do business consultations! You can count on Indiana’s tax expert!