Difference Between Standard and Itemized Deductions

Ines Zemelman, EA

• 06.05.22 • 5 min read

Did you know that you can reduce your tax bill either by taking itemized deductions or standard deductions? Wondering which one to choose? This article explains both of them in detail and highlights the difference between standard and itemized deductions. You will also find out what factors to consider when deciding whether to choose itemized or standard deductions to reduce your taxable income. 

What Do Standard And Itemized Deductions Entail?

When filing your tax return, the IRS allows you to deduct expenses incurred during the tax years to reduce your tax bill by using two ways: standard deduction or itemized deductions.

Can You Take The Standard Deduction And Itemized Deduction?

No, you cannot take both. You have to choose either one of them. There are situations when you are not eligible to take a standard deduction. We will look at those instances later. In those cases, your only option will be to go with itemized deductions.

 We are now going to talk about the standard and itemized deductions in detail.

Standard Deductions

The standard deduction is the predetermined amount that reduces your adjusted gross income (AGI). How much deduction you are allowed will depend on your filing status. The standard deduction amounts fixed for the year 2022 are as follows:

If you are met with an unfortunate disaster and you have a qualified loss then you might be eligible to claim an increased standard deduction.

When Are You Not Eligible To Take Standard Deduction?

You are not eligible to take a standard deduction if 

• You are married, file separately and your spouse itemizes deduction on their tax return.  Keep in mind that you both have to choose the same option either standard or itemized deductions.

• You are filing a tax return for a period of fewer than 12 months. This happens rarely.

• You are a nonresident alien or a dual-status alien during the year. However, if your spouse is a resident alien or US citizen you can take a standard deduction provided that you meet certain criteria. 

Itemized Deductions 

The itemized deductions are various expenses incurred during the tax year that the IRS allows you to deduct from your adjusted gross income (AGI). These eligible deductions reduce your taxable income which in turn lowers your tax liability. 

It is important not to confuse tax deductions with tax credits. Tax deductions reduce your taxable income whereas tax credit lowers your tax liability. 

To what extent you can save taxes will depend upon your tax bracket. To figure this out you need to multiply your total deduction with the effective tax rate. 

In 2018 the Tax Cuts and Jobs Act introduced some changes which will be in effect until 2025. If you took itemized deductions earlier you need to know that it is more beneficial to take a standard deduction which is now higher.

If you decide to go for itemized deductions you will file Schedule A form 1040. The expenses that IRS allows you to deduct are not limited to the ones mentioned in the following list 

1. Home Mortgage Interest

If you have purchased any home on or after Dec 16, 2017, by taking out a mortgage amounting to $750,000 or less then you are allowed to deduct the mortgage interest. Before this was introduced the mortgage loan limit was up to $1 million. However, if you have bought a home before Dec 15, 2017, you still have the option to refinance it under the old rules. 

2. Charitable Donations

Recent temporary changes in tax laws have been introduced by “Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

According to these new laws, individuals who take itemized deductions can now claim up to 100% of their adjusted gross income (AGI) for cash contributions they make to qualified charitable organizations. 

Before this these limits ranged anywhere from 20% to 60%. It is noteworthy that this relief will remain in effect for the contributions made during 2021. 

Additionally, you are allowed to deduct an additional $300 on your 2021 federal income for making charitable contributions in cash if you are taking the standard deduction. If you are married and file jointly you can claim up to $600. Previously, this deduction was not permitted to those taking the standard deduction.

3. Casualty And Theft Losses 

If you have suffered losses from a federally declared disaster you may claim these losses. According to the IRS

“Your net casualty loss doesn't need to exceed 10% of your adjusted gross income to qualify for the deduction, but you would reduce each casualty loss by $500 after any salvage value and any other reimbursement.”

4. Any Medical And Dental Expenses

If your medical and dental expenses are over 7.5% of your adjusted gross income and they are not reimbursed then you are allowed to deduct them. 

Which Factors Should You Consider Before Choosing Between Standard And Itemized Deductions?

If you have a choice and are wondering whether you should take the standard deduction or itemize your deduction, then you should consider the following factors before deciding. 

Record Keeping

When you choose standard deduction you will not have to show your records to the IRS in case they come to audit you whereas if you go with itemized deduction you need to make sure that your transactions are accurately recorded and correctly classified. You may also require the assistance of a professional accountant to do proper bookkeeping for you.  

Tax Rules

Itemized deductions involve decoding tricky tax rules while opting for standard deductions requires deducting a fixed dollar amount prescribed by the IRS.

Time

For claiming itemized deduction you need to study complicated tax rules and ensure all the applicable rulings are taken into account. Additionally, you need to maintain comprehensive records. Therefore it will be very time-consuming to go with itemized deduction. As for standardized deduction, it is simple, quick, and easy.

Once you understand the difference between standard and itemized deductions you have to choose between them.

You may benefit by itemizing your deductions if you are not eligible to take standard deductions or have a greater amount of uninsured medical and dental expenses. It might also be useful if you have suffered a loss from a federally declared disaster or made contributions to qualified charities. 

On the other hand, you can take standardized deductions in situations where you have no expenses to qualify for the itemized deductions.

Which methods would suit you the best will depend upon your specific situation. For example, if your adjusted gross income is $45,000 and your computed itemized deductions total is $16,000. 

If you take itemized deductions your taxable income will be $29,000. Alternatively, if you opt for the standard deduction, considering you are single in 2022 you would be able to claim $12,950 and your taxable income will be $32,050. In this case, it is wise to choose to itemize your deductions.

The following table illustrates the above-mentioned computation:

During tax filing season if one understands the difference between standard and itemized deductions it becomes easier to decide which one to take. You can always consult a tax professional to ensure that you opt for the method that gives you the maximum tax savings.