When filing their tax return, most taxpayers has the option to choose standard deduction or itemize deduction. Nevertheless, taxpayers should choose the deduction that produces the most beneficial outcome if eligible to do so.
Tax Deductions and credits are often confused; therefore, it is important to know the difference between the two. A tax deduction lowers your taxable income, while a tax credit lowers your tax liability or increases your refund.
Standard Deduction:
Standard deduction is a default and fixed amount given by the IRS. It is a default option if itemized deduction cannot be chosen and Schedule A, Itemized Deduction has not been completed. The fixed amount claimed is determined by the taxpayers filing status, age, and dependency. This amount increases every year by congress and has doubled since the TCJ Act of 2017 and has since then been more favorable for taxpayers. There are five filing status that a taxpayer can choose from based on eligibility. These are:
* Single: An individual who is claiming themselves and has no dependent, neither were they married.
* Head of household (HOH): An individual who is claiming one or more dependent of whom they have supported for more than half of the year and has fulfilled the eligibility requirements.
* Married Filing Joint (MFJ): Taxpayers who were married as of December 31, 2019 and are filing their tax returns together.
* Married Filing Separate (MFS): If you and your spouse are separated and are filing your tax returns separately (independently). This status, however, is not often favorable because it tends to exclude the taxpayer from taking advantage of certain credits offered by the IRS,
* Qualifying Widow(er) w/ dependent: If your spouse passed away in the prior tax year you can claim this status. You are then able to also claim this status for the next two proceeding years.
Itemized Deduction:
These are expenses that are deemed deductible and can be itemized according to the IRS; however, these expenses must have been incurred throughout the tax year and satisfied eligibility requirements. Though there are several deductions that can be itemized there are some limitations placed on certain expenses. Some of the itemized deductions that can be claimed includes:
* Medical & Dental Expenses (Over 10.0% of AGI)
Eligible taxpayers can deduct unreimbursed medical or dental expenses that was either paid for the taxpayer, their spouse, or dependent. The payment must be pertaining to medically necessary needs and not cosmetic. Example, Payments for doctor’s visit, obtaining a prescribed prescription, etc.
* State and Local income tax or sales tax in addition to personal property - SALT
This only apply for taxes that were imposed on the taxpayer. Which includes the option of claiming either state income taxes or sales taxes but not both along with personal property taxes. However, there is a $10,000 limit on the amount of SALT that can collectively be claimed. In other words, state and local income tax or sales tax and personal property taxes can not exceed $10,000 for the purposes of this deduction under no circumstances.
* Mortgage interest Expense
a. To be deductible the interest and points must have been incurred by the taxpayer’s main home or second home during the tax year.
b. Taxpayers can deduct interest on a mortgage loan debt of up to $750,000 – or $1 million, if the home was purchased before Dec. 15th, 2017.
c. These amounts are typically reported on Form 1098, Mortgage Interest Statement by the mortgage holder.
* Charitable contributions
a. This expense is only deductible if the taxpayer is taking the itemized deduction and the donations were made to a qualified organization (i.e. 501c3 status).
b. It is required by the IRS that taxpayers obtain and retain copies of all contributions made.
c. If non-cash donations are made to a qualified organization exceeding $5,000 a qualified appraisal on that item is required.
* Casualty & Theft Losses
This expense only applies if the casualty loss is from a federally declared disaster and you had to pay out of pocket expenses that were not reimbursed nor covered by insurance.
Though there are several other deductions to consider these are the main ones that often makes up the itemized deduction. However, other itemized deduction can also include gambling loss, investment expenses, and miscellaneous expenses. You may also deduct real estate taxes on your home. Nevertheless, like most other tax related items there are prohibitions and qualifications that must be considered before any itemized deduction can be deemed deductible.
In the end, when filing their tax return, most taxpayers can take advantage of either one of these deductions. However, it is recommended that taxpayers take advantage of the one that produces the most benefit. For example if you are a taxpayer claiming single status and have itemized deductions equating to $11,500, because you do have a fixed default standard deduction of $12,200, it would be in your best interest to take the standard deduction because it will give you the most beneficial outcome by lowering your taxable income.