A common question during tax time is whether you should itemize your deductions or use the standard deduction to reduce your taxable income. Optima Tax Relief reviews the benefits of each.
Standard Deductions
The standard deduction is a fixed amount determined by several factors, including income, age, filing status, whether you are legally blind, and inflation. You may not use the standard deduction if you meet any of these criteria:
- You are married filing as married filing separately, and your spouse itemizes their deductions
- You file a tax return for a period of less than 12 months due to a change in your annual accounting period
- You were a nonresident alien or dual-status alien during the tax year, unless you are a nonresident alien who is married to a U.S. citizen or resident alien at the end of the tax year and choose to be treated as U.S. residents for tax purposes
- You are filing for an estate or trust, common trust fund, or partnership
Using the standard deduction is not only the easiest way to reduce your taxable income, but also often the most effective way.
Itemized Deductions
Itemized deductions are eligible expenses you can subtract from your adjusted gross income to reduce your tax bill. Some of these expenses include:
- Medical and dental expenses, excluding amounts paid or reimbursed by others
- Taxes you paid, including state and local income or sales taxes, property taxes, and real estate taxes
- Interest you paid, including mortgage interest and points, investment interest, and mortgage insurance premiums
- Gifts to charity
- Casualty and theft losses from a federally declared disaster
You should only itemize your deductions through Schedule A (Form 1040) if the total deduction amount is greater than the standard deduction you qualify for. You may benefit from itemizing your deductions if you:
- Cannot claim the standard deduction
- Had large medical and dental expenses that were uninsured
- Paid mortgage interest or property taxes
- Claimed large “Other Itemized Deductions” (line 16 on Schedule A (Form 1040))
- Had large casualty, theft or disaster losses that were uninsured, or
- Made large contributions to eligible charitable organizations
