When the time comes to file your taxes, you have two options for deductions: take the standard deduction or itemize your deductions. Both methods help lower your taxable income, but choosing the right one can impact how much you owe or get back in a refund. Here’s what you need to know to make the best choice for your situation.
Understanding the Standard Deduction
The standard deduction is a set amount that reduces your taxable income. The amount changes every year and depends on factors such as your filing status, age, and whether you’re legally blind. If you’re 65 or older and don’t itemize, you’re entitled to a higher standard deduction.
The simplicity of the standard deduction makes it appealing to many taxpayers. You don’t need to track expenses or keep detailed records—it’s a straightforward way to lower your taxable income. However, not everyone is eligible to take it. You cannot use the standard deduction if you:
· Are married filing separately and your spouse itemizes deductions.
· File a tax return for a period of less than 12 months due to a change in your accounting period.
· Were a nonresident alien or dual-status alien during the year (unless married to a U.S. citizen or resident and electing to be treated as a U.S. resident for tax purposes).
When to Consider Itemizing Deductions
Itemizing deductions makes sense when your total deductible expenses add up to more than the standard deduction. It requires more recordkeeping, but it can lead to greater tax savings if you qualify for a high amount of deductions. Common itemized deductions include:
· State and local income or sales taxes
· Real estate and personal property taxes
· Mortgage interest
· Medical and dental expenses exceeding 7.5% of adjusted gross income
· Charitable donations
· Casualty and theft losses from a federally declared disaster
If you had high medical expenses, a mortgage, or significant charitable donations, itemizing could save you more money than taking the standard deduction.
Key Tax Considerations
In recent years, tax law changes have made the standard deduction higher, meaning fewer people benefit from itemizing. However, there are still situations where itemizing may be worthwhile. Here are some specific tax deductions that might impact your decision:
· State and local tax (SALT) deduction: This deduction is capped at $10,000 ($5,000 if married filing separately). Any additional state and local taxes paid beyond this limit are not deductible.
· Mortgage interest deduction: If you bought a home after December 15, 2017, you can deduct interest on up to $750,000 of mortgage debt ($375,000 if married filing separately). Older mortgages (originated before this date) maintain the previous $1 million cap.
· Charitable contributions: Donations to qualified charities are deductible, but you must keep proper records. If you donate items, they must be in good condition, and you need a receipt or documentation of their value.
· Charitable mileage deduction: If you drive your personal vehicle for charitable work, you can deduct 14 cents per mile in 2024.
· Gambling losses: If you had gambling winnings, you can deduct gambling losses up to the amount of your winnings—if you itemize.
Additional Benefits and Drawbacks
While the standard deduction is straightforward and often the best choice for those with few deductions, itemizing allows more flexibility to claim specific expenses. Some taxpayers may also benefit from “bunching” deductions—strategically timing certain deductible expenses in one year to surpass the standard deduction threshold. For example, making larger charitable donations in alternating years could maximize deductions over time.
Another important consideration is changes in life circumstances. Buying a home, experiencing significant medical expenses, or changes in income can all affect whether itemizing is beneficial. If your financial situation shifts, it’s worth reassessing which deduction method is best for you each year.
Making the Right Choice
Choosing between the standard deduction and itemizing depends on your financial situation. If your itemized deductions exceed the standard deduction, itemizing could save you more on your taxes. However, for many taxpayers, the higher standard deduction means less hassle and still results in significant tax savings.
Before filing, review your deductions carefully. If you’re unsure which option benefits you the most, consider consulting a tax professional to help you maximize your savings and ensure you’re making the right choice for your circumstances.
