Posted by The TaxAdvocate Group, LLC

Standard Deduction vs. Itemizing: Which should you choose?

Standard Deduction vs. Itemizing: Which should you choose?

The choice of many (whether standard deduction or itemizing) is usually a factor of which will provide a better financial benefit. In the following years, however, it can be challenging to choose, especially with tax reforms, which is almost doubling the amount of standard deduction.

Paying tax is a necessity that many people detest. The only good news is that there are several options with which one can reduce the amount paid. One of these is the choice between itemizing deduction or taking the standard deduction method. 

Between Standard deduction and Itemizing 

All tax filers have the opportunity of either going for standard deduction or itemizing of their deduction. Since these deductions reduce the taxable income, it can also reduce the tax bill. Hence, it makes sense to go for an option that will reduce your taxable income. How do you know which one?

Defining the Standard Deduction 

The IRS sets a specific amount that you can remove from your adjusted gross income. This is called the standard deduction. Your tax liability reduces because your taxable income also reduces. People who prefer a quick and easy method do go for the standard deduction method as you will not have to fill extra paperwork.

For 2020, the standard deduction amounts are:

    •    $12,400 for single taxpayers or married couples filing separate tax returns

    •    $24,800 for married filing jointly

    •    $18,650 for people filing as head of household

Who Qualifies for the Standard Deduction?

In filing tax, anyone can choose the standard deduction option. There are, however, some factors that might make this impossible. We explore some categories of taxpayers that are not qualified for standard deduction:

    •    A married couple that files separately and either of the spouse itemize deduction. Should any of the spouses itemize, both partners must.  

    •    A person who files separately, which is less than 12 months. Due to a change in the accounting period of the person.

    •    People are filing as a trust or an estate, partnership, or common trust fund.

Standard Deduction Pros and Cons 

The reason many people chose the standard deduction is due to the simplicity. All it involves is claiming a set value without extra paperwork and showing proof of your spending. With the increase to the 2019 amount, it is possible to skip the extra work of itemizing deductions. 

The con of this method is when the other approach (itemized deduction) would have resulted in a more substantial amount to reduce your tax bill.

Defining Itemized Deduction

If the itemized deduction is what you prefer, you complete a Schedule A and list all qualifying deductible expenses. It is a better option for you if it will be higher than the standard deduction. You will do extra work, which will mean a lower tax bill.

The amount you get using this method varies from  taxpayer to taxpayer as there are varying qualifying deductions as well as the entire qualifying deductions. On filing, you will have to highlight each deduction and substantiate it. This involves having proof of each deduction like a receipt.

The IRS advises that here are some common expenses one might itemize:

    •    Real estate taxes

    •    Charitable donations

    •    Personal property taxes

    •    Unreimbursed medical expenses

    •    Interest on a home mortgage

    •    Casualty or theft losses

Itemized Deductions: Updates 

The tax reform not only affected standard deduction, but it also changes itemizing. With this, there are many updates to keep in mind when using itemized deductions:

State and local taxes

Also known as SALT, the state and local tax deduction also has some updates. Some years back, it had no limit, but it now comes with a limit of $10,000 for all local and state taxes. (For married people filing separately, it is $5,000). 

For instance, if you had a property tax of $12,500 in 2017, you will be able to deduct the whole amount. If you are filing in 2020, you will only be able to deduct $10,000 of everything.

Itemized Deductions: Pros and Cons 

Taxpayers using the itemize deduction have the aim of maximizing their deduction. This is in a bid to reduce the adjustable gross income. 

The reason behind this is the possibility of paying lower taxes. We all want our tax bill to reduce even though it takes extra work if you will be taking the itemizing route. 

With itemizing, you will have to list all qualifying deductions, which is not so with the standard deduction. You will also have to calculate the corresponding expenditure while maintaining the record.

The TaxAdvocate Group, LLC
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