Deductions on your US tax return refer to eligible expenses or contributions that you can claim to reduce your taxable income, thereby lowering the amount of tax you owe. Tax filers can take either standard or itemized deductions on their US tax return.
Standard Deduction
The standard deduction is a fixed amount tax filers can deduct from their taxable income without enumerating their expenses. The IRS sets the standard deduction amount depending on your filing status, and is adjusted annually for inflation.
For the tax year 2023, the standard deduction amounts are:
- Single or married filing separately: $13,850
- Married filing jointly or qualifying widow(er): $27,700
- Head of household: $20,800
Taking the standard deduction is generally more advantageous if the total value of your eligible expenses is less than the standard deduction amount. It is also easier to use the standard deduction because you do not have to list down all qualified deductions, which requires a lot of records.
Not Eligible for Standard Deduction
There are some situations where tax filers may not be eligible for the standard deduction:
- Married Filing Separately: If your spouse itemizes deductions, you must also itemize deductions, even if the total itemized deduction amount is less than the standard deduction.
- Nonresident Alien or Dual-Status Alien: If you are a nonresident alien or file as a dual-status alien during the year, you cannot claim the standard deduction.
- Filing for Less than 12 Months: If you are filing a tax return for a period of less than 12 months, you may not be eligible for the standard deduction.
Itemized Deduction
Itemized deductions are eligible expenses you can claim on your tax return to reduce your taxable income. Rather than taking the fixed amount of standard deduction, you can list your eligible expenses on Schedule A of your Form 1040.
Some common expenses that can be itemized include:
- Medical and dental expenses (if they exceed 7.5% of your adjusted gross income)
- State and local income, sales, and property taxes (up to $10,000 per year)
- Mortgage interest and investment interest
- Charitable donations
- Casualty and theft losses
- Unreimbursed employee expenses
- Certain miscellaneous deductions include tax preparation fees, investment expenses, and legal fees.
When you itemize your deductions, you must keep careful records and documentation of your expenses, including receipts, cancelled checks, and other documents showing proof of payment and the nature of the expense. It’s important to note that not all expenses can be itemized, and some itemized deductions are subject to limitations and phase-outs. Additionally, the amount of your itemized deductions may be reduced if your adjusted gross income exceeds certain thresholds.
Is it better to Itemize or take the Standard Deduction?
Choosing between itemizing deductions and taking the standard deduction depends on which option lowers your tax liability more.
- When to Choose the Standard Deduction: If the sum of your eligible deductions is less than the standard deduction amount, it’s usually best to take the standard deduction. The standard deduction simplifies the process and often results in a higher deduction for those with lower eligible expenses.
- When to use Itemize Deductions: Itemizing may be advantageous if you have high deductible expenses that, when combined, exceed the standard deduction. For example, taxpayers with large medical expenses, high property taxes, significant charitable contributions, or mortgage interest payments might benefit from itemizing.
In many cases, high-income earners and homeowners with large mortgage payments find itemizing more beneficial due to the deductions available for mortgage interest and property taxes.
Choosing between the standard or itemized deduction largely depends on your unique financial situation. If your total eligible expenses are greater than the standard deduction for your filing status, itemizing may reduce your tax liability further. However, if the standard deduction provides a simpler and more advantageous tax result, it may be the better option.
Regardless of your choice, consulting a tax professional can help you make the most informed decision. If you need help with your US taxes or have any questions, please contact us at info@universaltaxprofessionals.com.
