Standard Deduction Vs. Itemized Deduction

Each year, taxpayers face the choice of taking the standard deduction or itemizing their tax deductions. Making the right choice can substantially reduce your tax bill; making the wrong choice means you will be paying taxes you didn’t need to pay. Which method is better for you depends on your personal circumstances and can change from year to year.

When to Itemize

You are better off itemizing your deductions if you the sum of your deductible expenses exceeds the amount of the standard deduction. This is often the case, for example, if you paid mortgage interest, made large charitable donations, or had substantial unreimbursed medical and dental expenses. You should be prepared to support your itemized expense claims with documentation if they are questioned by the Internal Revenue Service.

Itemization Limits

Some itemized deductions have limits with regard to how much you can claim and deduct. For example, as of 2017 you can only deduct medical expenses that exceed 10 percent of adjusted gross income; and you can only subtract miscellaneous deductions, such as unreimbursed employee expenses, that exceed 2 percent of income.

Choosing Standard Deduction

If you don’t have many deductible expenses, you probably are better off choosing the standard deduction. This is a fixed amount you subtract from your gross taxable income. The IRS doesn’t question the standard deduction so you won’t ever need to produce evidence to support it. For taxpayers who are single or married filing separately, the standard deduction as of 2018 is $6,350. For those who are married filing jointly or a qualifying widow(er) with a dependent child, the deduction is $12,700. An unmarried head of household can deduct $9,350. If you or your spouse is over age 65, the standard deduction increases by $1,550.

Required Itemization

Some taxpayers don’t have the option of taking the standard deduction and must itemize. Those who are nonresident aliens or dual-status aliens can’t choose the standard deduction, nor can taxpayers who file a return for less than 12 months because of a change in accounting periods -- for example, if they switched from a fiscal year to a calendar year. If you are being claimed as a dependent by someone else, your standard deduction is limited to the greater of $1050 or your earned income plus $350, up to a maximum of $6,000. When your standard deduction exceeds your income, you pay no income tax and may get a refund of withheld taxes.

Other Rules

If you and your spouse file separate tax returns rather than filing jointly, you and your spouse must use the same method for claiming deductions. That means you both must itemize or both must take the standard deduction. A taxpayer who finds he made the wrong choice between standard and itemized deductions in a particular year can change his deduction method by filing Form 1040X to amend his tax return. He must do so, however, within three years of filing the original return.