Education Center

Tax – Standard vs. Itemized

June 16, 2023

Every year, many people are faced with the decision of whether to take the standard deduction or itemize their deductions on their taxes. The standard deduction is a fixed dollar amount that reduces overall taxable income by that dollar amount, no questions asked. On the other hand, the itemizing option involves listing out individual expenses that the IRS deems allowable to reduce your taxable income. Which deduction method to choose is important because, while both lower taxable income, the amount reduced can vary.

Furthermore, in 2017, the Tax Cut and Jobs Act (TJCA) was signed, nearly doubling the standard deduction and restricting many itemized deductions from 2018 through 2025. This law simplified the deduction process for many taxpayers who itemized deductions in past years, but still added new factors to consider when choosing a deduction method.

This being the case, understanding the differences between these options and when to use each can help you maximize your tax savings.

When to consider taking the standard deduction: 

1. Your itemized deductions are less than the standard deduction:
   1. If the total of your itemized deductions is less than the standard deduction amount, it makes more sense to take the standard deduction.
   2. For example, in the 2023 tax year, the standard deduction for individuals is $13,850 and $27,700 for married couples filing jointly (inflation adjusted). If your itemized deduction is less than either of those numbers respectively, then choosing the standard deduction would net you a larger tax benefit.
2. You don’t have many itemizable deductions:
   1. If you don’t have many deductible expenses, such as mortgage interest, charitable contributions, and medical expenses, taking the standard deduction will likely be your best option. 
3. You don’t want to keep records:
   1. Itemizing requires keeping receipts and records for all your deductible expenses. If you don’t want to keep track of these items, it may be easier to take the standard deduction. 

When to consider itemizing: 

4. Your itemized deductions are greater than the standard deduction:
   1. If the total of your itemized deductions is greater than the standard deduction amount, it makes more sense to itemize.
   2. This can be especially true if you have a lot of mortgage interest, charitable contributions, and medical expenses. 
5. You have a large amount of mortgage interest:
   1. Mortgage interest is a common itemized deduction, and if you have a large amount of it, itemizing can significantly reduce your taxable income. 
6. You have significant medical expenses:
   1. Medical expenses can also be itemized, and if you have significant out-of-pocket costs, it can make sense to itemize these deductions. 

In conclusion, the choice to take the standard deduction or itemize your deductions depends on your individual circumstances. Determining the size of your itemized deductions, the amount of record-keeping you are willing to do, and the deductions that you are eligible for can be a difficult task, but it is important. Therefore, we recommend consulting with a financial advisor and tax professional to help you make the best decision to maximize your tax situation. 

Resources

1. https://www.taxpolicycenter.org/briefing-book/how-did-tcja-change-standard-deduction-and-itemized-deductions
2. https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023