Let’s get started!
Whether you are an amateur or an experienced tax filer, there is one dilemma that you’ll always face when it comes to filing your tax returns, whether you should itemize or take the standard deduction.
Before 2017, it was pretty common for taxpayers to itemize deductions. However, the TCJA was a complete game-changer as Congress almost doubled the standard deduction. Now, about 87% of taxpayers use the standard deduction instead of itemizing their expenses.
To help you determine which approach works best for you, we have noted down the basics of standard and itemized deductions and some pros and cons of each.
To start with, let’s first define the standard deduction- It is a fixed dollar amount that reduces the income you’re taxed on. Generally, your standard deduction varies according to your filing status, income, age, and whether or not you are blind. Each year, the IRS bumps up the standard deduction a little bit to adjust for inflation.
The standard deduction amounts for the year 2022 are as follows:
Strandard Deduction 2022
Married Filing Jointly
Married Filing Separately
Head of Household
The standard deduction rate increases if you’re blind or above the age 65. It also increases if you are a qualifying widow(er).
With the approval of the Tax Cuts and Jobs Act of 2017, more and more tax players have been opting for the standard deduction since it eliminates the need to itemize deductions, like medical expenses and charitable donations. Plus, it involves a lot less paperwork.
To sum it up, the standard deduction is like a fixed amount you may get if you don’t qualify for a higher amount through itemized deductions. If you feel like your taxes are pretty straightforward, then you should go with the standard deduction.
An itemized deduction is a qualified expense that can help you reduce your AGI. However, unlike the standard deduction, the dollar amount of itemized deductions differ from taxpayer to taxpayer. By itemizing your personal expenses you are opting to take the specific deductions you list on your tax return.
Some of the common itemized deductions include:
Home mortgage interest, property taxes, and state income taxes are some of the largest deductions, and for this reason, homeowners tend to itemize a lot more than renters.
But, with the recent tax law changes, a new set of limits have been placed on some of the above-mentioned categories. For example, when it comes to the medical and dental deduction category, only the expenses that exceed 7.5% of your AGI can be deducted.
Similarly, for 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. Plus, the home equity loan interest is only to be itemized if the loan was used to buy, build, or improve your home.
When it comes to deducting your state and local taxes, the IRS now limits your total state and local tax deduction to $10,000. However, with Charitable donations, you can deduct up to 100% of your AGI.
Let’s bust the myth once and for all. Itemizing your personal deductions has nothing to do with your business expenses. Unlike personal deductions, business expenses involve the purchases you make for your freelancing business.
So, the answer is yes, you can claim standard deductions along with self-employed business expenses.
The personal itemized deductions are reported on Schedule A, but these business deductions are to be reported on Schedule C
The IRS views a business expense as something that is both ordinary and necessary for your business. Some of the common business deductions include:
You must choose whether to itemize or take the standard deduction each year since you can’t deduct both, so to help you decide to let’s look at some of the pros and cons of standard and itemized deductions:
Generally, it is suggested that anyone with deductible expenses that exceed the standard deduction should itemize. So, to decide whether itemizing is worth it, you need to run the number using both methods.
Add up all the personal expenses you wish to claim. If the value of the itemized deduction is more than the standard deduction, then you should consider itemizing and if you’re below that threshold, then claiming the standard deduction makes more sense.
You may benefit by itemizing on Schedule A, if you:
Note: Those who cannot itemize on an annually can try to bundle their charitable contributions. For example, by combining 2-3 years’ worth of contributions into a single year, you can benefit from an increased itemized deduction.