Understanding Tax Deductions

Tax deductions reduce your taxable income, which can lower your overall tax bill. You generally have two options: taking the standard deduction or itemizing your deductions.

What are Itemized Deductions?

Itemized deductions are specific expenses that you can subtract from your adjusted gross income (AGI) to reduce your taxable income. To take itemized deductions, you must file Schedule A (Form 1040), Itemized Deductions.

Common itemized deductions include:

• State and local taxes (SALT) up to $10,000
• Home mortgage interest
• Medical and dental expenses (exceeding 7.5% of AGI)
• Charitable contributions
• Casualty and theft losses from a federally declared disaster

What is the Standard Deduction?

The standard deduction is a fixed dollar amount that you can subtract from your adjusted gross income (AGI) if you choose not to itemize. It's a simpler option for many taxpayers.

Standard deduction amounts vary based on your filing status and are adjusted annually for inflation. For example, in a recent tax year, typical standard deduction amounts were:

• Single: ~$13,850
• Married Filing Separately: ~$13,850
• Married Filing Jointly: ~$27,700
• Head of Household: ~$20,800

Additional standard deductions are available for those who are age 65 or older or blind.

Itemized vs. Standard: How to Choose

The general rule of thumb is to choose the deduction method that results in a lower taxable income, which means a lower tax bill. You should itemize if your total itemized deductions exceed your standard deduction amount.

If your itemized deductions are less than or equal to your standard deduction, it's usually more beneficial to take the standard deduction, as it's simpler and often provides a larger deduction.

Example Calculation

Let's consider a single taxpayer with an Adjusted Gross Income (AGI) of $70,000. The standard deduction for a single filer is $13,850.

Scenario 1: Itemized Deductions

• State and Local Taxes (SALT): $5,000
• Mortgage Interest: $8,000
• Charitable Contributions: $2,000
• Total Itemized Deductions: $5,000 + $8,000 + $2,000 = $15,000

In this case, the itemized deductions ($15,000) are greater than the standard deduction ($13,850). Therefore, the taxpayer would choose to itemize, reducing their taxable income by $15,000.

Scenario 2: Itemized Deductions (Lower Amount)

• State and Local Taxes (SALT): $3,000
• Mortgage Interest: $5,000
• Charitable Contributions: $1,000
• Total Itemized Deductions: $3,000 + $5,000 + $1,000 = $9,000

Here, the itemized deductions ($9,000) are less than the standard deduction ($13,850). The taxpayer would choose the standard deduction, reducing their taxable income by $13,850.

Always compare your potential itemized deductions to the standard deduction amount for your filing status to determine the most beneficial option.