The first thing that should be established before analyzing what Standard Deduction and Itemized Deductions are, is what is income tax. Income tax is the amount of money that the United States federal or state government takes from your taxable income. Now you may ask then, what is taxable income? Well taxable income is the part of your earned income for they year that will be subject to tax payments. This is why your total income earned for the year, and your taxable income for the year are not the same, because the government allows a portion of the total income your earned during the year to be subtracted or deducted to reduce the income that will be taxed. Taxable income is usually smaller than total income due to these deductions, that are made to help reduce your tax bill.
This is where the standard deduction and the itemized deductions come into play. In order to deduct the amount of income that will be subject to U.S. taxes, you are allowed to select one of two types of deductions, either the itemized deductions or the standard deduction. You can choose whichever you prefer, but what you cannot do is use both.
Key Differences between Standard Deduction and Itemized Deductions :
The itemized deduction option allows you to list all your tax-deductible expenses for the year. Some of these expenses include:
- Eligible charity donations
- Medical expenses
- Property Tax
- Gambling losses
- Other costs incurred that influence your final tax figure
Usually, taxpayers calculate their total value of itemized deductions, and if it is higher than the standard deduction, they itemize. Otherwise, they opt for the standard deduction.
The Standard Deduction on the other hand may be greater than the total that taxpayers could reach if they added up all their eligible tax-deductible expenses separately. The Standard Deduction amount changes every year, and is calculated depending on:
- Your filing status
- Your age, and
- Whether you are disabled or claimed as a dependent on someone else’s tax return
One of the main reasons that taxpayers use the standard deduction more often than itemized deductions is that many taxpayers benefit more from the standard deduction because the amount is greater than the total they could reach if they added up all their eligible tax-deductible expenses separately. Additionally, by using the standard deduction, taxpayers don’t have to keep track of every possible qualifying expense throughout the year that will qualify as a tax-deductible expense.
However, beware that not all taxpayers qualify for the standard deduction. Read my article on Limits to Standard Deduction to fully understand who these taxpayers are and whether you qualify or not for this deduction.
Need to Know More?
Contact Licensed Tax Attorney Alexandra Sabalier for an initial consultation, and get your questions answered personally by her, and your tax issues solved in a reliable and confidential manner.