Think of tax deductions as little (and sometimes not-so-little) gifts from the Internal Revenue Service (IRS). Their value is subtracted from your taxable income, then your tax is calculated on what's left.
For example, if you earned $80,000 in 2019 and claimed $15,000 worth of deductions, reducing your taxable income to $65,000, you would have saved yourself $3,300 in taxes. That's based on a 22% tax rate, which is the bracket you'd fall under if filing single or head of household.
The IRS gives you a couple of options for deductions. You can claim the standard deduction for your filing status, or you can itemize your deductions, but you can't do both. Then there are "above the line" deductions, and you can take these in addition to the standard or itemized deductions.
The Standard Deduction
The amount of the standard deduction you’re entitled to depends on your filing status.
|Filing status||2018 tax year||2019 tax year||2020 tax year|
|Married, filing jointly||$24,000||$24,400||$24,800|
|Married, filing separately||$12,000||$12,200||$12,400|
|Head of household||$18,000||$18,350||$18,650|
Since the standard deduction is indexed for inflation, it creeps up incrementally every year. Indexing different components of the tax code prevents you from being pushed into a different income tax bracket because of inflation rather than an increase to your income.
Special Rules for Dependents, the Elderly, and the Blind
People older than 65 and those who are legally blind are entitled to an additional deduction on top of the standard deduction.
These additional amounts for the 2019 tax year are:
- $1,650 if filing as single or head of household
- $1,300 if married and either you or your spouse is blind or older than 65
- $2,600 if married and both you and your spouse are blind or older than 65
These numbers don't apply if someone else can claim you as a dependent. In that case, your standard deduction is the larger of $1,100 or your earned income plus $350 in the 2019 tax year. It can't exceed the 2019 standard deduction of $12,200 for a single filer.
Itemized deductions allow you to convert otherwise taxable income into nontaxable income if you spend money on certain tax-privileged items. If you choose to itemize, tally up your various deductions item by item on Schedule A, then enter the total on your Form 1040 and file Schedule A with your tax return.
Some of the itemized deductions available include:
- Medical expenses: Medical, dental, prescription drugs, and other health care costs, including some insurance premiums, that exceeded 7.5% of your adjusted gross income (AGI) in 2019 are allowable. The limit is the same for 2020.
- Taxes paid: You can claim state and local income taxes or sales taxes, real estate (property) taxes, or personal property taxes, up to $10,000. This cap drops to $5,000 for married taxpayers who file separate returns.
- Mortgage interest: Interest paid on home mortgages of up to $750,000, excluding home equity loans that are not used to "buy, build, or improve" the property, can be claimed on your taxes. If you're married filing separately, you are limited to $375,000 in indebtedness.
- Charitable contributions: You can claim contributions and donations made to qualified organizations up to 60% of your AGI. Excess charitable contributions can be carried over to future years' tax returns for up to five years.
- Gambling losses: As long as the amount you lost does not exceed the total amount of gambling winnings being reported, you can deduct it using Schedule A.
Changes With the Tax Cuts and Jobs Act
The debate between itemizing or claiming the standard deduction became more complicated after the passage of the Tax Cuts and Jobs Act (TCJA) in December 2017. The TCJA eliminated some itemized deductions, including those involving work-related expenses, and it restricted others. On the other hand, the standard deduction was essentially doubled.
Where you once could take advantage of a casualty and theft itemized deduction, now theft and casualty losses are limited to those that occur within a federally declared national disaster area.
"Above-the-line" adjustments to income include educator expenses, contributions to certain qualified retirement plans, and student loan interest. These are subtracted from your income right off the bat to determine your adjusted gross income (AGI). You can claim them in addition to the standard deduction or the total of your itemized deductions, which then come off your AGI.
Choosing Itemized or Standard
The IRS advises that many people may find it more beneficial to take the standard deduction instead of itemizing. The White House even projected in 2017 that the amount of taxpayers who choose to itemize would fall from 26% of taxpayers to just 8%.
Your total itemized deductions in all categories might add up to only a handful of extra dollars over the standard deduction amount for your filing status—if they exceed the standard deduction amount at all. However, if that's not the case, you’ll save more in taxes if you invest the time and effort into itemizing.
In the end, it comes down to your personal tax situation and which option reduces your taxable income the most. You'll need to run the numbers to find out whether the amount you can itemize exceeds the standard deduction. Working with an accountant or using trusted tax software can help.
And here's a caveat: If you and your spouse file separate returns, you both must take the standard deduction or you both must itemize. Your returns have to match in this respect.