When filing your individual income tax returns, you are allowed to deduct certain expenses from your taxable income, thus reducing the amount of income tax you must pay. There are two ways you can take deductions on your federal tax return: you can deduct a defined amount, the standard deduction, or you can list specific qualified expenses, itemized deductions.
Standard or Itemized?
How do you know which option to choose? The quick (and obvious) answer is to choose the method that is most advantageous to you in giving you the lowest overall tax. Changes to the tax law over the past few years included dramatic increases to the standard deduction amount, so many taxpayers who used to itemize deductions have found it beneficial to switch to the standard deduction. We’ll discuss a few things to keep in mind when deciding which deduction option to use.
The Standard Deduction
The standard deduction amount varies depending on your income, age, whether or not you are blind, and filing status. There are variations in the standard deduction amount nearly every year because IRS makes inflation adjustments. In addition, a filer’s circumstances can change in ways that affect the standard deduction amount allowed. It is a good idea to find out the standard deduction you are allowed each year so you can make an informed decision about which deduction option to take. It’s also a good idea to consider the amount of time it would take to gather all the documents necessary to itemize. It may be that using the simpler standard deduction would be a better use of your (and your accountant’s) time if tax savings from itemizing aren’t significant.
For 2021, the standard deduction amounts for the following filing statuses are:
- Single $12,500
- Married, filing jointly $25,100
- Married, filing separately $12,550
- Head of household $18,800
Age 65 and older or blind add $1,350. If age 65 and older or blind and unmarried and not a surviving spouse, add $1,700. (You need to pay close attention to all the “ors” and “ands” in the tax law!).
Standard Deduction Not Available to Some Taxpayers
Not all taxpayers can use the standard deduction. Some of the taxpayers who cannot use it include:
- A married individual filing as married filing separately whose spouse itemizes deductions
- An individual who files a tax return for a period of less than 12 months because of a change in his or her annual accounting period
- An individual who was not a US resident or was a dual-status taxpayer during the year
Taxpayers choose itemized deductions by filing Schedule A, Form 1040. Itemized deductions you are allowed to claim include:
- Unreimbursed medical and dental expenses (the amount that exceeds 7.5 percent of adjusted gross income)
- State and local income tax, sales taxes, and real estate and personal property taxes (currently limited to $10,000 but Congress may change)
- Home mortgage interest
- Mortgage insurance premiums on a home mortgage
- Personal casualty and theft losses from a federally declared disaster
- Gifts to a qualified charity
Taxpayers can no longer claim:
- Investment management fees
- Tax preparation fees
- Unreimbursed employee expenses
- Interest on home equity loans if funds were used for something other than improving your main or second home
Record Keeping and Cautions
If you choose to itemize deductions, you must keep receipts or other proof of payment for each item claimed. On audit, IRS will disallow deductions claimed with no documentation. Be careful with your charitable donations. Donations to nonqualified charities such as civic and employee organizations are not deductible. Further, donations to political parties or candidates are not deductible.
There are a lot of details to consider when choosing standard or itemized deductions. Contact one of R&A’s tax professionals if you have questions and we’ll happily answer them.
About this Author
Susan is experienced in tax research, not-for-profit taxation, trusts and estates, and sales tax. She has prepared tax returns for pubic charities, private foundations, and charitable trusts as well as unrelated business income tax returns for numerous charities.