Itemized and standard deductions can be confusing – especially if you are relatively new to filing a tax return.
Some people try to itemize when they are better off using the standard deduction. On the other hand, some taxpayers avoid itemizing because it seems too difficult — even when itemizing deductions could save them money.
Here are some key concepts you should understand to get the best tax savings from itemized deductions or the standard deduction, without spending more time on your taxes than necessary.
You can deduct itemized deductions or the standard deduction, but not both
The standard deduction is a set amount that the Internal Revenue Service (IRS) lets you deduct from your taxable income. This amount is based on your filing status, age and other factors.
Instead of taking the standard deduction, you can claim all the deductions to which you are entitled on Schedule A. This is called itemizing your deductions.
Some people can’t take the standard deduction
You can’t take the standard deduction if you are married filing separately and your spouse itemizes deductions.
You also cannot itemize when you file for a tax period of less than one year, or if you were a nonresident alien or dual-status alien during the year.
You must generally have significant deductions to benefit from itemizing
If you have only a few small deductions, you probably shouldn’t itemize. You’re better off using the standard deduction.
Don’t worry about gathering up receipts for itemizing deductions unless you may have more than these standard deduction amounts:
2016 Standard Deduction Amounts:
|Filing Status||Standard Deduction|
|Married Filing Jointly||$12,600|
|Qualifying Widow(er) with Dependent Child||$12,600|
|Head of Household||$9,300|
|Married Filing Separately||$6,300|
Keep in mind that you are allowed additional standard deductions if you are 65 or older at the end of the tax year or if you are blind.
If you are a dependent of someone else, such as your parents, your standard deduction is the greater of $1,050 or your earned income (such as wages) plus $350, but the total cannot exceed the basic standard deduction for your filing status..
If you have a high income, your deductions may be limited
If your adjusted gross income is over certain limits, your allowable itemized deductions are reduced. The limits are $258,250 if you file as Single; $309,900 for Married Filing Jointly or Qualifying Widow(er); $154,950 for Married Filing Separately; or $284,050 if you file as Head of Household.
The standard deduction is not reduced when your income is higher. However, if you are subject to the Alternative Minimum Tax, you may be better off taking itemized deductions.
Some deductions only count after they reach a “floor”
If you have certain itemized deductions, such as medical expenses, you may be expecting to benefit from itemizing your deductions.
However, medical expenses only improve your tax bill when they are quite substantial. You can deduct most medical expenses only to the extent they exceed 10 percent of your adjusted gross income (7.5 percent if you or your spouse are age 65 or older at the end of the tax year).
The exception to this rule is the cost of medical insurance if you are self-employed. You can deduct premiums for self-employed health insurance as an adjustment to income, even if you do not itemize deductions.
Personal exemptions are in addition to deductions
Each personal exemption you claim reduces your taxable income by $4,050 (2016). That’s in addition to either the standard deduction or itemized deductions.
If in doubt, enter your itemized deductions in TaxAct.
It’s not difficult to find and enter your itemized deductions in tax software. For your major itemized deductions, such as home mortgage interest expense, you probably have already received a form in the mail showing how much to enter.
Don’t forget charitable contributions, including non-cash contributions. Enter the information to take a sales tax or state income tax deduction, if it applies to you. You might be surprised at how fast the deductions add up.
TaxAct calculates your standard deduction and compares it to your allowable itemized deductions, and lets you decide which to claim.
Don’t feel bad if you don’t have enough deductions to itemize
Some people are disappointed when they don’t get to itemize. They may have bought a house and they heard about how much they would save on taxes the next year. Then it turns out their total deductions are still less than their itemized deductions.
The best way to think of it is not that your deductions didn’t do you any good. It’s just that the standard deduction was even better. That’s nothing to feel bad about.