The Standard Deduction

The standard deduction was added to U.S. tax law by the 2017 Tax Cuts and Jobs Act to replace the personal exemption on individual income tax returns. Essentially, the standard deduction guarantees that at least some of each U.S. taxpayer's income will not be subject to tax.

One of the reasons the standard deduction was introduced was to simplify the tax returns of most Americans by sparing them the effort of tracking and reporting all of their deductible expenses each year.

The standard deduction amount is based on filing status, and the Internal Revenue Service (IRS) adjusts it for inflation every year based on an individual's tax filing status. For 2023, the standard deduction was set at $13,850 for single filers, $27,700 for married people filing jointly (or qualifying widows or widowers), and $20,800 for heads of households.

You are not required to claim the standard deduction. If your tax bill would be lower by deducting your eligible expenses for such things as charitable contributions and mortgage interest, you still have that option. This is known as itemizing your deductions, which are claimed on Schedule A (1040).

What Is a Tax Deduction?

A tax deduction lowers your tax bill by reducing the amount of earned income subject to tax by the amount of the deduction. Most deductions only apply to your earned income and not to capital gains on profits from the sale of assets. It is important to understand that if you claim a tax deduction to reduce the income you report to the IRS on your federal tax return, your tax savings are usually significantly less than the amount of the deduction.

For example, if you are a single filer who earned $50,000 in 2023 and claimed the standard deduction, your taxable income would be reduced to $36,150. Since you would pay $6,308 in federal income taxes on $50,000 in income and $4,118 on $36,150, claiming the $13,850 standard deduction would save you $2,190. The savings would come in two forms: reducing your taxable income and lowering your tax rate by moving you into a lower tax bracket.

Tax deductions are different from tax exemptions because an exemption is a dollar-for-dollar reduction in the amount of tax you pay rather than simply reducing your taxable income.

Additional Deductions May Be Claimed

Even if you claim the standard deduction, there are still some tax breaks you may be entitled to use to reduce your taxable income. These include deductions for retirement plan contributions, health savings account contributions, alimony for divorces finalized before 2019, student loan interest, and certain health insurance premiums if you are self-employed.

Larger Standard Deduction for Some Taxpayers

In some situations, taxpayers are allowed to claim an additional standard deduction amount. The standard deduction increases by $1,850 for single taxpayers or heads of households who are over the age of 65 or are blind. Married taxpayers who are over 65 or blind can add $1,500 to their standard deduction for each qualifying individual. Single taxpayers or heads of households who are both over 65 and blind can claim an additional $3,700, and married couples over 65 can claim an additional $3,000 per individual who qualifies as blind.

Who Can't Claim the Standard Deduction?

Not everyone is eligible to claim the standard deduction. Those who are not eligible include:

• Married individuals filing a separate return when their spouse itemizes their deductions
• Individuals who were nonresident aliens or dual-status aliens during any part of the tax year
• Individuals who file returns for a period of less than 12 months due to a change in their annual accounting period

Who Should Claim Itemized Deductions?

While an estimated 90% of U.S. taxpayers claim the standard deduction each year, there are some taxpayers who benefit more from claiming itemized deductions. That is usually done when the total of the itemized deductions is greater than the dollar amount of the standard deduction. Payments for the following are often deductible:

• State income taxes and property taxes
• Local taxes
• Sales taxes
• Charitable donations
• Mortgage interest
• Out-of-pocket medical expenses that exceed 7.5% of adjusted gross income (AGI)

Even if you itemize, the amount you are allowed to deduct for the items listed above may be capped. For example, the total you can claim for state and local tax payments is capped at $10,000 annually. Also, if you are self-employed or own a small business, you are probably eligible for additional deductions.

Fortunately, most taxpayers who use tax software like TurboTax don't need to make a decision about whether to itemize on their own because the software will do it for them. You can also hire a tax attorney or certified public accountant (CPA) to make that decision for you.

Additional Questions? Speak With a Lawyer

If you are not sure whether you would be better off claiming the standard deduction or itemizing, a local tax attorney can help you analyze your financial situation to ensure you choose the option that benefits you most.