How do I know whether to itemize deductions or take the standard deduction?
Individuals filing a tax return have the option of taking either a standard deduction or itemizing their deductions. Deductions reduce the amount of income that the federal government considers taxable. Taking the standard deduction is the easiest and most common method chosen by filers, but many taxpayers may wind up paying less tax if they itemize qualified expenses. While tax preparation companies often calculate both methods, people preparing their taxes on their own should still consider figuring out how much they will save under each method.
The standard deduction is the easiest deduction to claim, and can be claimed even if the taxpayer doesn’t have expenses that could otherwise be itemized. The amount of the standard deduction is based off the taxpayer’s filing status, age, and whether the filer is blind. It is a fixed amount that reduces the amount of income that is considered taxable, and the amount of the deduction can change from year to year because it takes into account inflation. Taxpayers filing as single are offered the lowest standard deduction, while those married filing jointly are given the highest deduction. Claiming the standard deduction requires the taxpayer to use Forms 1040, 1040A or 1040EZ. In some cases, such as a married couple filing separately with one taking itemized deductions, the standard deduction is not allowed.
Calculating itemized deductions is more complicated than taking the standard deduction, though all taxpayers should still figure out whether itemizing makes sense. Taxpayers use Schedule A to calculate which expenses qualify, with common examples including home mortgage interest, real estate taxes, personal property taxes, state and local taxes, medical and dental expenses, investment interest, job expenses, and charitable donations. Homeowners are often the most likely to benefit from itemizing, though a general rule of thumb is to look into itemized deductions if there were any expenses that were incurred over the course of the year that are a lot higher than normal. For example, if floods caused substantial losses, or if the taxpayer had a substantial bill related to a medical emergency.