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.
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 2022, the standard deduction amounts are:
- Single or married filing separately: $12,950
- Married filing jointly or qualifying widow(er): $25,900
- Head of household: $19,400
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.
However, there are some situations where tax filers may not be eligible for the standard deduction, such as:
- If you’re married filing separately and your spouse itemizes deductions, you must also itemize deductions. This applies even if the total itemized deduction amount is less than the standard deduction.
- If you’re a nonresident alien or dual-status alien during the year.
- If you are filing a tax return for less than 12 months.
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.
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Therefore, choosing whether to use a standard or itemized deduction depends on which deduction provides a lesser tax liability.
Nevertheless, considering the factors mentioned above and the availability of information, consulting with a tax professional is essential to determine which option applies to your case and will result in the lowest tax liability for your situation.
If you need help with your US taxes or have any questions, please contact us at info@universaltaxprofessionals.com.
