There are two ways to lower your federal income tax by reducing your taxable income: take the standard deduction or itemize deductions.
- Standard deduction: The standard deduction amount, which was increased by the Tax Cuts and Jobs Act of 2017, is different for each filing status and is higher for blind taxpayers and those who are age 65 or older. The amounts are also adjusted for inflation each year.
- Itemized deductions: Itemizing your deductions lets you deduct certain eligible expenditures from the tax year, such as medical expenses, mortgage interest, real estate and personal property taxes, and charitable contributions. You must fill out a Schedule A form to itemize your deductions.
How itemized deductions work
When you choose to itemize, there are a few things to keep in mind. First, not every dollar you spend can be subtracted from your income. In the medical and dental deduction category, for example, only expenses that exceed 7.5 percent of your adjusted gross income (or AGI) can be deducted. If you didn’t spend that much, then none of your medical costs are deductible.
There also are restrictions on how much you can deduct for casualty losses suffered in a federally declared disaster, as well as limits on the deductibility of very large charitable contribution amounts.
Finally, recent tax law changes placed new limits on the mortgage interest deduction. Interest may only be deducted on mortgage debt up to $750,000. However, the limit remains at $1 million if your loan was originated before December 16, 2017. Home equity loan interest may only now be used as an itemized deduction if the loan funds were used to buy, build, or improve your home.
Advantages of itemized deductions
The IRS offers a long list of eligible expenses for itemizing on your taxes. Depending on your financial situation and how you spent your money during the tax year, your itemized deductions could be a larger dollar amount than the flat standard deduction. So, itemizing would allow you to shield more income from taxes and lower your overall tax bill.
Disadvantages of itemized deductions
Itemizing deductions requires more paperwork, filling out Form 1040 Schedule A, and keeping records of those expenditures in case you get audited. And while there are plenty of opportunities to itemize, each category has its own rules and limitations of how much can be deducted.
How standard deductions work
The difference between a standard deduction vs. itemized is that a standard deduction is a flat dollar amount determined by the IRS that requires less paperwork and record keeping. And for many taxpayers, the standard deduction is higher than your itemized deduction would be — which means you’ll save more on your taxes.
Your standard deduction amount depends on your taxpayer filing status.
2020 tax return standard deductions
|Filing status||Standard deduction amount|
|Single filers or married couples filing separately||$12,400|
|Head of household||$18,650|
|Married couples filing jointly||$24,800|
Some older and visually impaired taxpayers may be able to cut their tax bills with even larger standard deduction amounts by simply checking a couple of boxes on their tax returns.
That means the standard deduction might now be appealing to even more taxpayers.
Remember, you always want to use the deduction method that gives you the biggest tax advantage.
So, if all those receipts you stashed last year in the hopes of turning them into tax breaks add up to less than your standard deduction amount, throw them away. There’s no need to waste your time filling out extra forms.
Advantages of using the standard deduction
There are no limits as to who can claim a standard deduction. Every taxpayer is eligible. Plus, you’ll save a lot of time and energy by not having to fill out the Schedule A form used to itemize deductions. If you use a professional tax preparer, you could also save an average of $100 on your fees by using the standard deduction. Finally, you could potentially qualify for a higher deduction when you opt out of itemizing. An estimated 90 percent of American households opt for the standard deduction when filing taxes each year.
Disadvantages of using the standard deduction
You may leave money on the table by using the standard deduction rather than itemizing. It may be worth analyzing your expenses each year to make sure you pick the right option. For instance, you may not have any eligible medical expenses one year, and then have a major health issue in the family the next year that makes it more beneficial to itemize. Don’t just assume that your decision should automatically be the same each year.