Deciding whether to itemize or take the standard deduction can make a huge difference in your tax bill. But the decision isn’t always easy. Here are some things you need to know about the standard deduction versus itemized deductions on tax returns.
What are tax 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:
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.
If your standard deduction is less than your itemized deductions, you probably should itemize and save money.
Why people take the standard deduction
The standard deduction is basically a flat-dollar, no-questions-asked reduction in your adjusted gross income.
- It’s faster. Taking the standard deduction makes the tax-prep process relatively quick and easy, which probably is a big reason most taxpayers take the standard deduction instead of itemizing. You might be able to use the 1040EZ and the 1040A; they’re much shorter and simpler than the regular Form 1040.
- It usually gets bigger every year. Congress sets the amount of the standard deduction, and it’s typically adjusted every year for inflation.
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- Some people get more (or less). The standard deduction is higher for people 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.
- 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 their deductions
Itemized deductions are basically 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.
- They can add really up. The more you can deduct, the less you’ll pay in taxes, which is why some people itemize — the total of their itemized deductions is more than the standard deduction.
- Some situations 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 money.
- There are hundreds of possible deductions. Some of the most common include medical expenses, property taxes, home-office expenses, charitable contributions and mortgage interest.
- You can get help. 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.
- You understand the rules. Some deductions come with a few hurdles, of course. If you have medical expenses, for example, you can only deduct the portion that exceeds 7.5% of your adjusted gross income.
- You have the time. If you itemize, you’ll need to set aside 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 have proof. You 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.
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How to decide whether to itemize or take the standard deduction
- Here’s what it boils down to: If your standard deduction is less than your itemized deductions, you probably should itemize and save money. If your standard deduction is more than your itemized deductions, it might be worth it to take the standard and save some time.
- Run the numbers both ways. If you’re using tax software, 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.