You undoubtedly want to make your income tax payment as low as possible, whether you’re a business owner or an employee. Deductions are helpful in this situation. Whatever your financial situation is, there are a variety of expenses that you may be entitled to deduct from your taxes.
Charitable gifts, mortgage interest, student loan interest, some business-related fees, and medical expenses are just a few of the costs and contributions that can be deducted.
Today’s topic relates closely to tax deductions as it is part of the two primary forms of tax deduction – standard deduction.
Here, we shall go into the nitty-gritty of standard deductions, whether or not you should opt for standard deduction as opposed to itemized deduction, and who are the people that qualify for standard deductions. We also speak of some of the special considerations that are in place for this.
What Is Standard Deduction?
The standard deduction is a cash amount that non-itemizers can deduct from their income before income tax is levied under US tax law. Taxpayers can select between itemized deductions and the standard deduction, but they usually choose the option that results in the lowest tax bill.
The standard deduction is the amount of untaxed income that can be utilized to lower your tax burden. If you do not itemize your deductions and use Schedule A of Form 1040 to determine taxable income, the Internal Revenue Service (IRS) permits you to take the standard deduction.
Your standard deduction is calculated depending on your filing status, age, and whether you are disabled or claimed as a dependent on another person’s tax return.
The amount of money taken from your taxable income by the federal or state governments is known as income tax. It’s vital to keep in mind that taxable income and total income for the year are not the same things.
This is because the government enables a portion of total income to be reduced or deducted in order to lower the amount of income that will be taxed. Due to deductions, taxable income is frequently less than total income, lowering your tax payment.
Itemized deductions or the standard deduction are the two types of deductions available. It’s up to you which one you use, but you can’t use both.
The itemized deduction option allows you to specify all of your tax-deductible expenditures for the year, including property taxes, medical bills, qualifying charity gifts, gaming losses, and other items that affect your tax bill.
Should You Opt For Standard Deduction?
Ordinarily, you would itemize if the total amount of your itemized deductions exceeds the standard deduction. If you don’t have any other options, you should take the standard deduction.
The main advantage of the standard deduction over itemized deductions is that taxpayers do not have to keep track of every possible qualifying expense throughout the year. Furthermore, many people may find that the standard deduction amount is higher than the total they could obtain if they tallied up all of their tax-deductible expenses separately.
The people that can get standard deduction are based on their filing status:
- Single
- Married filing jointly
- Married filing separately
- Qualifying widow(er)
- Head of household (single but with one or more dependents)
If you’re using tax software, it’s usually worth your time to answer all of the itemized deduction questions that come up. This is due to the fact that the software, or your tax professional, can run your return both ways to see which option results in a lesser tax bill.
Even if you wind up taking the standard deduction, you’ll at least know you’ve saved money.
If you aren’t sure whether to itemize deductions or take the standard deduction, it’s a good idea to run the numbers. Whatever gives you the most significant deduction is the one you should probably go for.
If you accept the standard deduction, you won’t be able to deduct house mortgage interest or any of the other common tax deductions, such as medical expenditures or charitable contributions.
It’s worth noting, though, that the standard deduction isn’t available to everyone. If you fall into one of the following groups, you’ll almost certainly be forced to itemize your deductions:
- Because you’re changing your yearly accounting period, you file a tax return for a period of fewer than 12 months.
- At any point throughout the tax year, you were a non-resident alien.
- You and your spouse are married and file separately, with your spouse itemizing their deductions.
Basically, nonresident aliens and their spouses, married people filing separately whose spouses itemized, and trusts and estates aren’t eligible for the standard deduction.
Special Considerations
Individuals who are 65 years old or older, as well as those who are legally blind, are eligible for an additional standard deduction. It’s determined by adding the taxpayer’s standard deduction plus an additional amount, depending on their filing status.
If you’re married but filing separate returns, you and your spouse must both take the standard deduction or itemize your deductions. You can’t itemize one spouse’s taxes while the other takes the standard deduction.
It’s always a good idea to do your taxes both ways, with each spouse itemizing and each spouse taking the standard deduction, to see which option saves you the most money in the long run.
Standard deduction levels for taxpayers who can be claimed as dependents on someone else’s tax return are varied. The deduction is limited to the standard deduction for their filing status—it cannot exceed that amount.
TCJA
The TCJA increased the standard deduction while lowering the personal exemption amount to zero, which would have been over four thousand dollars back in 2018. The elimination of personal exemptions negated some of the benefits of larger standard deductions, resulting in a modest increase in the taxable income threshold for singles and couples.
Because the majority of the TCJA’s individual income tax provisions expire after 2025, taxable income thresholds will revert to what they would have been under previous law unless Congress extends or makes current law permanent. As there are still four years to go, only time will tell.
Also Read: An Overview Of Tax Exemption
