Deciding whether to itemize or take the standard deduction is a big deal — the choice can make a huge difference in your tax bill. But making that decision isn’t always easy. Here are some things you need to know about standard versus itemized deductions on tax returns.
What are deductions?
Deductions are dollar amounts you subtract from your adjusted gross income, thereby reducing your taxable income. And the lower your taxable income is, the lower your tax bill will be.
The IRS allows taxpayers to deduct lots of items, such as:
- Medical expenses.
- Property taxes.
- Charitable contributions.
- Casualty and theft losses.
- Mortgage interest.
Those are some of the most common deductions allowed by the IRS. There are a multitude of deductions available.
You could meticulously save all the receipts for all your deductions throughout the year and then spend time during tax season calculating and reporting each deduction separately. Or you could simply take the standard deduction, which is a flat dollar amount, and be done with it. The question is which method saves you more money.
Why people take the standard deduction
What is the standard deduction, anyway? Basically, it’s a flat-dollar, no-questions-asked reduction in your adjusted gross income. It makes the tax-prep process relatively quick and easy, which probably is a big reason why almost 70% of taxpayers take the standard deduction instead of itemizing.
Congress sets the amount of the standard deduction, and it’s typically adjusted every year for inflation. The standard deduction that you qualify for depends on your filing status, as the table below shows.
The 2015 and 2016 standard deduction
| Filing status | 2015 | 2016 |
|---|---|---|
| Single individual | $6,300 | $6,300 |
| Married filing separately | $6,300 | $6,300 |
| Head of household | $9,250 | $9,300 |
| Married filing jointly | $12,600 | $12,600 |
The standard deduction is higher for those who are over 65 or blind, though filing status is still a factor. And if someone can claim you as a dependent, you get a smaller standard deduction. See the rules for 2015 here.
If you take the standard deduction, you might spend a lot less time filling out forms. That’s because you can use the 1040EZ and the 1040A; they’re much shorter and simpler than the regular Form 1040.
One note for married people: You can’t take the standard deduction if you’re married but filing separately and your spouse chooses to itemize. You both have to do the same thing — either itemize or take the standard deduction.
Why people itemize
Generally, people itemize because the total of their itemized deductions is more than the standard deduction. And remember, the more you can deduct, the less you’ll pay in taxes.
What are itemized deductions? Basically, they’re expenses allowed by the IRS that can decrease your taxable income. If deductions were a restaurant, itemizing would be like ordering from the a la carte menu and the standard deduction would be like ordering the prix fixe dinner.
Some of life’s situations may make itemizing especially attractive. If you own your home, for example, your itemized deductions for mortgage interest and property taxes may easily exceed the standard deduction, saving you more money.
There are hundreds of possible deductions. Some of the most common include medical expenses, property taxes, home-office expenses, charitable contributions, tax preparation fees, job-search expenses, casualty and theft losses, and mortgage interest. Tax software or a good tax advisor can help you figure out which deductions you’re eligible for and whether the total adds up to more than your standard deduction (learn more about choosing free online tax software here).
Some deductions come with a few hurdles, of course. If you have medical expenses and you’re under 65, for example, you can only deduct the portion that exceeds 10% of your adjusted gross income. If you have unreimbursed work expenses or other miscellaneous itemized deductions, you generally can only deduct the amount that exceeds 2% of your adjusted gross income.
If you itemize, you’ll need to set aside some extra time when preparing your returns to fill out the big enchilada of tax forms: the Form 1040 and Schedule A (you can’t use the shorter 1040EZ or 1040A).
You also will need to be able to substantiate your deductions. That means keeping records and being organized.
If you normally take the standard deduction and are thinking of itemizing when preparing your return next year, start saving your receipts and other proof for your deductions now.
Make the call
Here’s what it boils down to: If your standard deduction is less than your itemized deductions, you should itemize and save money. If your standard deduction is more than your itemized deductions, take the standard and save some time.
If you’re using tax software — or your tax advisor is — it’s probably worth the time to answer all the questions about itemized deductions that might apply to you. Why? The software or your advisor can run your return both ways to see which method produces a lower tax bill. Even if you end up taking the standard deduction, at least you’ll know you’re coming out ahead.
Tina Orem is a staff writer at NerdWallet, a personal finance website. Email: torem@nerdwallet.com.
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