Have you ever wondered about the difference between standard and itemized deductions?
You’re not alone! I recently discussed a trend our office has seen over the last several years.
Taxpayers who had always itemized are now taking the standard deduction.
A gentleman raised his hand and said, “I hate to admit it, but I’m not sure I really know the difference between standard and itemized deductions.”
I’ve always said that if one person has a question, then there are most likely many others with the same question.
So, here goes.
Standard Deduction: What is it, and how does it work?
Both the standard and itemized deductions work by reducing your taxable income.
The standard deduction is just what it sounds like – a fixed, base-level amount you can use if you don’t qualify for a higher amount through itemized deductions.
The standard deduction is a set amount based on your filing status – married filing jointly, single, head of household, and so on.
Beginning in 2018, the standard deduction was nearly doubled, and the personal exemption was removed.
Since then, millions of households no longer need to go through the complex process of itemizing their deductions.
Using the standard deduction makes it possible to lower your taxes without having to keep track of itemizable expenses throughout the year.
How much can you deduct?
2023 Standard Deduction Amounts
The 2023 standard deduction amounts are as follow:
- $13,850 for single or separate filers
- $20,800 for head of household filers
- $27,700 for married filing jointly.
- Those amounts go up if you’re 65 or over or blind.
Regarding the 2023 increase, the Wall Street Journal reported, “This is the largest automatic adjustment to the standard deduction since core features of the tax system were first indexed to inflation in 1985.”
Itemized deductions are tax breaks you can only take if you itemize.
By itemizing, you are giving up the standard deduction – you can’t take both.
Instead, you are opting to take the specific expenses you can use as deductions and list them on your tax return.
Some of the more common itemized deductions include:
Mortgage expense – This can include mortgage interest and mortgage insurance premiums.
Other taxes – You may be able to deduct the amount you paid for state and local taxes, including personal property real estate taxes.
Gifts to charity – if you can itemize, you can deduct the fair market value of the clothes and household items you gave to Goodwill, as well as cash donations to a church or charitable organization.
Medical and dental expenses – A deduction is available for unreimbursed expenses above a certain percentage of your income.
Under the current tax law, if your tax picture is pretty simple and you don’t have a lot of special circumstances, you’ll probably use the standard deduction.
If you want more information, don’t hesitate to contact us or your tax professional.