Standard deduction vs. Detail your tax return
The standard deduction and itemized deductions reduce the amount of tax you pay in a given year. So which is the best? Should you itemize or should you keep it simple and take the standard deduction? We explain when each option makes sense.
It’s important to note that good tax software will help you make the decision for you by automatically choosing the deduction that gives you the greatest savings.
If you’re not sure which tax software to use, check out our list of the best tax software to get started.
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What is the standard deduction?
The standard deduction is a way to reduce your taxable income in a given year. For example, a single person who earned $50,000 in 2022 receives a standard deduction of $12,950. This means that this person will pay taxes on $37,050 ($50,000 minus $12,950).
No matter how much or how little you earn in a given year, you can claim a standard deduction.
Married, separate filing (per spouse)
The standard deduction is standard for a reason. Most people will find no more than $12,950 in expenses that they can itemize. The few people who can detail are usually people who give generously to charity and live in counties with high property or income taxes.
What does detailing taxes mean?
Itemizing your taxes means you are using valid personal expenses to claim a deduction greater than the standard deduction. When you claim a larger deduction, you pay less tax, so it’s obviously best to itemize your taxes when you can.
However, only certain expenses can be itemized. The most common expenses people itemize include:
- Charitable donations
- Mortgage interest (up to $750,000 mortgage)
- State and local income tax or sales tax
- Property taxes
- Medical expenses (worth more than 10% of your income)
When these types of expenses total more than the standard deduction, it makes sense to itemize your tax return.
If you are unsure if you have more details than your standard deduction, your tax software choice will prompt you to enter all of your information and then show you the difference.
Reduce taxes without detailing
Itemizing isn’t the only way to lower your tax bill. There are many legal ways to reduce your taxable income. We have a full list of the best tax benefits that currently exist today.
For example, if you contribute money to a workplace retirement plan — like a 401(k) — or a traditional IRA, you can deduct the contribution from your gross income. This means that the person who earned $50,000 and contributed $5,000 to their 401(k) will pay taxes on $32,050 ($50,000 less the standard deduction of $12,950 less the retirement contribution deduction of 5 $000).
And this is just one example among many others. In addition to retirement savings, you can deduct legitimate business expenses on your Schedule C (such as driving expenses, materials, equipment, etc. for your side business). Contributing to a health savings account is a great way to save for medical expenses and avoid taxes.
Other deductions you can claim without itemizing include educator expenses (for classroom supplies), student loan interest, and child support you paid.
These deductions are called “above the line” deductions and are a great way to reduce your tax bill. “Above the line” deductions can be combined with your standard deduction, so it makes sense to load above the line deductions (where you legally can, of course).
Strategic planning to “load” when detailing
With the new, larger standard deductions, determining which years to itemize can be a challenge. But, you may find it advantageous to detail some years and not others. If this is your case, some strategic financial decisions can help you maximize the benefit of itemizing certain years.
For example, if you buy a house and pay $3,000 in points (prepaid interest), plus $2,000 in mortgage interest, plus $2,000 in property tax, and $8,000 in income tax from State, it might be worth detailing.
But you can increase this tax benefit by doubling charitable contributions. For example, if you donate $5,000 a year, consider donating $10,000 the year you bought the house (perhaps donating at the start and end of the year). year, making up for the missed previous or future year). This gives you an additional $5,000 to itemize. Then the following year you can switch to standard deduction if that makes sense.
Synchronizing big expenses (like buying a house or big surgeries or other expenses) with big giving opportunities can help you maximize the benefits of itemizing years where it makes sense.
It can be difficult to know whether it makes sense to take the standard deduction or itemize at first glance. However, tax software makes this decision easy and automatic.
But each tax software package will help you determine which one is right for you by asking a series of questions. If you are unsure which software is right for you, check out our guide to the best tax software.