Itemized vs Standard Deductions

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Itemized vs Standard Deductions

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.

Itemized vs Standard Deductions

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:

Filing Status

Strandard Deduction 2022

Single

$12,950

Married Filing Jointly

$25,900

Married Filing Separately

$12,950

Head of Household

$19,400

Surviving Spouses

$25,900

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.

What’s the itemized 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:

  • Medical and dental expenses
  • Long-term care premiums
  • Personal property taxes
  • Home mortgage
  • Casualty and theft losses
  • Charitable donations
  • State & local taxes
  • Gambling losses

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.

Can I claim standard deductions along with freelance business deductions?

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:

  • Car and mileage expenses
  • Travel expenses
  • Home office expenses
  • Computers and software
  • Business meal expenses
  • Office expenses
  • Advertising expenses
  • Postage and delivery
  • Education expenses
  • Internet & phone expenses

Itemized vs Standard Deductions

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:

Pros of Standard Deduction

  • No limits as to who can claim a standard deduction. Every taxpayer is eligible.
  • Taking the standard deduction is fast and easy with no unnecessary paperwork.
  • No Schedule A required.
  • With the TCJA, the standard deduction rates nearly doubled. Plus, Each year, the IRS bumps up the standard deduction a little bit to adjust for inflation.
  • The standard deduction is higher for people over 65 or blind, though filing status is still a factor.

Cons of Standard Deduction

  • Standard deductions involve certain filing limitations. If you're married and filing separately, you can't claim a standard deduction if your spouse itemizes his or her deductions.
  • You may end up with a smaller deduction. The standard deduction amount can be lower than the amount you could deduct if you itemize.

Pros of Itemized Deduction

  • There are hundreds of possible deductions, you can deduct your medical bills, home mortgage, charitable donations, etc. By itemizing, you can claim more expenses than you would if you claimed the standard deduction.
  • Some situations make itemizing especially attractive. If you are a homeowner, you can benefit a lot by itemizing your expenses.
  • When it comes to charitable donations, you can deduct up to 100% of your AGI unlike the standard deduction, where you can only deduct up to $300 of charitable contributions made in cash. Itemizing may allow you to shield more income from taxes and lower your overall tax bill, depending on your situation.

Cons of Itemized Deduction

  • Although there are plenty of expenses to itemize, each category has its own rules and limitations of how much can be deducted.
  • Some situations make itemizing especially attractive. If you are a homeowner, you can benefit a lot by itemizing your expenses.
  • Itemizing deductions requires more paperwork, filling out Form 1040 Schedule A, and keeping records of those expenditures in case you get audited.
  • Not everyone will save money on their tax bill by itemizing, some people will be better off taking the standard deduction.

Who should Itemize the 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:

  • Can’t use the standard deduction or the amount you can claim is limited.
  • Have large uninsured medical and dental expenses
  • Have mortgage interest or property taxes to deduct
  • Have large uninsured casualty or theft losses from a Federally declared disaster
  • Made large contributions to qualified charities

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.