Income taxes are a considerable expense to many Americans, so looking for ways to reduce taxes can make a difference.
One of the most significant tax breaks that you get is being allowed to take either a pre-determined amount off your taxable income, based on your filing status and age, or to use Schedule A to deduct the amount you spent on many ordinary expenses from your income. These two options are your “standard” and “itemized” deductions.
For many of us, we don’t know what these terms mean, because our tax preparation program, tax preparer usually decides for you. But understanding the difference can help you plan through the year to take advantage of tax breaks.
The first thing to discuss is what a deduction is. It is a very general term and refers to amounts that you subtract from your income to determine the amount of income you’ll have to pay taxes on. That’s referred to as your taxable income. Using the standard or itemized deduction lowers your taxable income, which ultimately reduces your tax bill as a whole. It is different from a tax credit which is a dollar for dollar reduction in taxes.
The Standard Deduction
The standard deduction is a set amount that you can subtract from your income, which varies based on filing status and age. Taking the standard deduction is easy because you don’t have to do anything to get this tax break. Everyone who files taxes gets to take this deduction. The table below shows how much you’re allowed to subtract. In 2011 the general standard deductions were:
- Filing as single or married filing separately: $5,800
- Filing as married filing jointly: $11,600
- Filing as head of household: $8,500.
If you are 65 or older and you file as single, married filing separately, or head of household, you’ll get an additional $1,450 more on top of your standard deduction from the list above. If you file as married filing jointly and are 65 or older, you’ll get an additional $1,150. If you’re legally blind, you’ll also get an additional $1,450 – blind taxpayers who are 65 or older get to add both amounts on top of the numbers in the bullet point list above.
When Can’t You Take the Standard Deduction?
If you’re facing these specific circumstances, you won’t be able to take a standard deduction:
- If you’re married, filing a separate return, and your spouse itemizes their deductions, you cannot take the standard deduction. Both you and your spouse must use the same deduction method even if you aren’t filing jointly. If you don’t match, the IRS will reject both your returns.
- If you’re a nonresident alien or dual-status alien during any part of the year, you generally are not able to take the standard deduction. Check out Publication 519, the U.S. Tax Guide for Aliens, for more specifics.
The Itemized Deduction
Your standard deduction, combined with your personal exemption of $3,700, does significantly reduce your tax liability without any work on your part. However, the IRS allows you to choose to use the itemized deduction instead if that would benefit you more. The itemized deduction is not a pre-set amount like the standard deduction. The amount that each person would be able to deduct as their itemized deduction depends on the amount that they spent on various expenses. These expenses are all listed on Schedule A – to find out how much your itemized deduction is, you have to fill out the list on Schedule A to find out how much it would add up to for you. For more information on what expenses are on Schedule A, click here. The most common expense is home mortgage interest – since for many homeowners this adds up to more than their standard deduction, many homeowners will use the itemized deduction instead of the standard deduction.
Generally speaking, itemizing is worthwhile when your total amount of expenses on Schedule A add up to more than the amount of the standard deduction you’re entitled to. It can take a lot of expenses to make itemizing worthwhile but can be very valuable for people who have a lot of expenses in those categories.
Which “Deduction Type” Is Best For You?
Generally, whatever lowers your taxable income the most. The most important thing to understand about the difference between standard and itemized deductions is that you can only use one of them. You can’t combine them – you must choose one or the other. If you want to take the standard deduction, you can’t also take any deductions for items on Schedule A, like for charitable donations or mortgage interest.
For a lot of people, especially those who don’t own a home, the standard deduction is the better choice. It can take a lot of expenses to make the itemized deduction a better choice, and since mortgage interest is the largest and most common expense on Schedule A, it usually makes up the bulk of the itemized deduction for most people. But if you do have a lot of deductions, or if you’re planning your tax moves for next year, it’s a good idea to do the math and see if you might be better off itemizing your deductions. Keep a list with all your qualifying expenses through the year, and you’ll be able to make the decisions at tax time more quickly and easily, and even see if you can bump up your deduction with some end-of-year donations.
Some people plan to take the itemized deduction in one year and the standard deduction in another. It never hurts to talk about tax planning strategies with your tax preparer or CPA to lower your taxable income the next time you file.