Tax season might not be most people’s favorite time of year, but it is something we must all go through. We know you might rather be doing a lot of other things right now than talk about tax deductions (yard work or laundry, for example), but we’re in this together and promise to make it as painless as possible!
You may already be familiar with standard versus itemized deductions, but as we get ready to le tax returns for what can only be called an unprecedented year, it’s not a bad idea to review some tax basics.
Remember, tax deductions are claimed with the hope that they could save you money by decreasing your taxable income! So stick with us as we do a quick refresher and dive into the nitty gritty of standard and itemized tax deductions.
Whether you le your taxes yourself every year or have an accountant do it, you’re probably familiar with the idea that your taxable income impacts how much tax you owe (you can learn more about tax brackets here).
Keep in mind that not every dollar and cent you made throughout the year is necessarily taxable income (that is, the income amount you have to pay taxes on). This is where tax deductions come in. Generally speaking, certain expenses you incurred during the year may be “deductible” or subtracted from your taxable income, which could help lower the amount of taxes you pay.
Here’s a basic example. Say your gross income for the year is $80,000 and you receive a tax deduction of $15,000. This could help lower your taxable income to $65,000 ($80,000 - $15,000).
Now let’s jump into it– standard deduction vs. itemized! (And remember – you can only claim one of these, not both).
The standard deduction option is, well...the standard. Almost any individual is eligible for the standard deduction (we’ll get into the exceptions later). For 2020 the standard deduction is $12,400 for single filers or married ling separately, $18,650 for heads of household and $24,800 for those married ling jointly.
You don’t have to le any extra forms to get the standard deduction or declare any specific expenses. It’s usually an option you can select on your Form 1040.
As we mentioned earlier, not everyone can take the standard deduction. The IRS says the following tax filers may not be able to claim it:
Now that we’ve explained what a standard deduction is, let’s get into the reasons why it might be an option for you.
Like we mentioned previously, using the standard deduction does not require any additional forms, potentially saving you time during tax season. Additionally, many tax lers can claim it, regardless of income. Certain taxpayers could also qualify for an even bigger deduction under the standard deduction, based on age and/or disability.
In 2020, taxpayers who are 65 years or older, or those who are blind, are eligible for an additional deduction of $1,300 or $1,650 (depending on their tax-ling status).
Overall, using the standard deduction can be convenient and time-saving. You know exactly how much you can expect to deduct and don’t have to sort through and organize various expenses.
After hearing “convenient” and “saves you time” you might be thinking, “So what’s the downside, then?”
The answer is actually quite straightforward (although it does require saying the word “deduction” about a dozen times). The standard deduction might not be your best option if itemizing your deductions would result in a larger deduction.
We’ll get into itemized deductions in the next section, but in terms of deciding which to use, in some cases, it really can be as simple as which deduction provides the greatest subtraction to your taxable income.
While the standard deduction allows taxpayers to subtract a set amount from their taxable income, itemized deductions allow taxpayers to lower their taxable income through a list of qualifying expenses approved by the IRS.
From the sound of that, you might’ve already guessed that itemizing your deductions will likely take more time than simply checking the “standard deduction” box on your tax forms.
To itemize your deductions, you can use Schedule A, Form 1040. Qualifying expenses can include:
Clearly, that can be a lot to keep track of. Sure, you might be able to pull some of that information straight from bank statements. But combing through them and then organizing the expenses can take some time, as you want to be sure all of the amounts are accurate and you’re not forgetting anything.
Yet the work may be worth it if the total of your itemized deductions ends up being more than the standard deduction. (This could help further lower your taxable income.) If you’re itemizing deductions, the main thing you’re looking for is whether the amount of your itemized deductions is going to be greater than the standard deduction.
For a single taxpayer in 2020, for example, that means you’d have more than $12,400 in qualifying expenses to deduct.
You might be surprised that in general, itemizing deductions is less common for taxpayers. According to the Tax Foundation, from April 2019, only 13.7% of taxpayers were predicted to itemize their deductions as opposed to taking the standard deduction.
For individuals who are eligible for the standard deduction, you may still choose to itemize your deductions instead if the amount of your qualifying expenses is more than the standard deduction (pretty obvious, but hey, when it comes to lowering the amount of taxes you owe, a little reminder never hurt).
You may have figured this out already: If your allowable deductible expenses for the tax year don’t exceed the standard deduction you’re eligible for, itemizing is likely not your best bet.
Because itemizing requires quite a bit of work compared to just taking the standard deduction, you want to have a pretty good idea of how much you stand to save by itemizing over taking the standard deduction.
Trying to decide between the standard deduction or itemizing means having to review your expenses for the year and doing some math to figure out which option could give you the bigger deduction.
Remember, everyone’s tax situation is dierent, so it’s a good idea to chat with a tax professional who can help you crunch the numbers and decide which deduction works for you.
United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management (“GS PFM”) is a registered investment adviser and an affiliate of Goldman Sachs & Co. LLC and subsidiary of The Goldman Sachs Group, Inc., a worldwide, full-service investment banking, broker-dealer, asset management, and financial services organization.
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