Itemized and Standard Deductions—Which is better?
When tax season rolls around, one big question often arises: “Itemized vs Standard Deduction—Which is better?” Your decision can make a big difference in how much tax you pay or how much of a refund you get. Understanding the differences between these two approaches is crucial for saving money. Whether you’re a small business owner or an individual filer, this guide on Itemized and Standard Deductions will help you make the best choice.
What Are Itemized and Standard Deductions?
Before you decide, it’s essential to understand the difference:
- Standard Deduction: This is a flat amount that reduces your taxable income. The IRS sets this amount based on your filing status. For 2024, it’s $14,600 for single filers and married couples filing separately, $21,900 for a head of household, and $29,200 for married couples filing jointly and surviving spouses. It’s simple to claim because you don’t need to track or prove any expenses.
- Itemized Deductions: Instead of taking the flat deduction, you can list specific deductible expenses. These might include mortgage interest, medical bills, or state taxes. If your itemized deductions add up to more than the standard deduction, you’ll save more money by itemizing.
How to Decide Between Itemized and Standard Deductions
Not sure whether to go with the itemized deduction or the standard deduction? Here’s how you can decide:
- Add Up Your Eligible Expenses: Make a list of expenses that qualify as itemized deductions. Common ones include mortgage interest, property taxes, medical bills over 7.5% of your income, and charitable donations.
- Compare the Numbers: If your total itemized deductions are higher than the standard deduction, itemizing will save you more money.
- Think About Your Situation: Certain situations make itemizing more appealing. For example:
- You own a home and pay mortgage interest.
- You’ve had large medical bills or made big charitable contributions.
- You live in a high-tax state.
- Use Tools or Ask for Help: Tax software or an accountant can do the math for you. They’ll show which option gives you the biggest tax break.
Common Itemized Deductions
If you’re considering the itemized deduction, here are the most common ones to check:
- Mortgage Interest: Homeowners can deduct interest on mortgages up to $750,000 (for homes purchased after 2017).
- State and Local Taxes (SALT): You can deduct up to $10,000 in state and local income, property, or sales taxes.
- Medical and Dental Expenses: If these costs exceed 7.5% of your adjusted gross income, you can deduct the excess.
- Charitable Donations: Donations to qualified charities are deductible. Keep all receipts as proof.
- Disaster Losses: If you’ve suffered a loss due to a federally declared disaster, you may be able to deduct the damage.
Pros and Cons of the Standard Deductions
Pros:
- Simple and Fast: No need to track expenses or gather receipts.
- Predictable Amount: You know exactly how much you’ll deduct based on your filing status.
- Lower Audit Risk: Choosing the standard deduction usually reduces IRS scrutiny.
Cons:
- Missed Savings: If your actual deductible expenses are high, you might miss out on bigger tax breaks.
Pros and Cons of Itemized Deductions
Pros:
- Bigger Tax Savings: If you have many qualifying expenses, itemizing can reduce your taxable income significantly.
- Tailored to Your Life: Deduct specific expenses that matter to you, like medical bills or mortgage interest.
Cons:
- Time-Consuming: Gathering receipts and filling out extra forms takes more effort.
- More Complex: Requires detailed record-keeping and may need professional help.
- Higher Audit Risk: Certain deductions, like charitable contributions, are more likely to attract IRS scrutiny.
Conclusion
Deciding between the itemized deduction and the standard deduction depends on your unique financial situation. If your expenses are low or close to the standard deduction amount, stick with the standard deduction for simplicity. But if you’ve had significant expenses, like mortgage interest, medical bills, or state taxes, itemizing could save you more.
To make the best choice, take time to calculate your deductions or consult a tax professional. With the right approach, you’ll save money and feel confident when filing your taxes.
Here is why you may not get full tax refund from the IRS. To learn how to earn tax-free income with the Augusta Rule, we have this article with all the information you need.
What is an EIN and how can you apply for it for your business? Read about it here and follow the IRS guidelines and set your business up for success by applying for an EIN today!
