When filing your federal income tax return, you have the option of claiming either the standard deduction or itemizing your deductions. The choice that benefits you most depends on your individual financial situation.
The Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (TCJA) significantly increased the standard deduction amounts for all filing statuses. This made it more likely for taxpayers to benefit from the standard deduction rather than itemizing. However, some taxpayers with high medical expenses, state and local taxes, or charitable contributions may still find it advantageous to itemize. But, the Tax Cuts and Jobs Act, enacted in 2017, is set to expire at the end of next year. This sunset will bring about the reversion of several tax provisions to their pre-TCJA state unless Congress takes action. While many assume that the current tax law is the norm, the TCJA was only approved as a temporary solution and the changes were not made permanent.
Standard Deduction
The standard deduction is a fixed dollar amount that you can subtract from your adjusted gross income (AGI) before calculating your taxable income. The standard deduction is a simple amount that varies based on your filing status (single, married filing jointly, etc.), and is adjusted annually to account for inflation. For example, a married couple making $180,000 a year and filing jointly, would have a standard deduction of $29,200 as referenced in the table above. This would reduce their taxable income to $150,800. Their Federal tax bill in 2024 would be $23,282 and they would be in the 22% tax bracket
Itemized Deductions
Itemizing your deductions allows you to list specific expenses that you incurred during the year. These expenses can include:
- Medical expenses: Out-of-pocket medical costs that exceed 7.5% of your AGI.
- State and local taxes: Property taxes, income taxes, and sales taxes. (capped at $10,000)
- Charitable contributions: Donations to qualified charitable organizations.
- Mortgage interest: You can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness.
To itemize your deductions, you must gather documentation to support your claims. This can be time-consuming, but it may be worthwhile if your itemized deductions exceed the standard deduction.
For example, take the same couple from the previous example making $180,000, however they had…
- State and local taxes - $10,000
- Mortgage Interest - $20,000
- Charitable contributions - $15,000
This would increase their deduction to $45,000 and their taxable income would then be $135,000. Their Federal Tax bill would be reduced by $4,022 to $19,086.
Choosing the Right Option
To determine whether you should claim the standard deduction or itemize, compare your total itemized deductions to the standard deduction amount for your filing status. If your itemized deductions are greater, you should itemize. Otherwise, claiming the standard deduction is generally more beneficial.
You could also consider multi-year planning using a bunching strategy. The purpose of bunching is to itemize your tax deductions in some years and take the standard deduction in other years. In some cases, this can increase your total tax deductions across multiple years.
Understanding the difference between standard and itemized deductions is crucial for maximizing your tax refund. By carefully considering your financial situation and the impact of the TCJA, you can make an informed decision that will save you money on your taxes.