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Itemized deductions and the standard deduction are two options that taxpayers can choose when filing their tax returns. The choice affects how much taxable income is reduced, potentially influencing the amount of taxes owed. The standard deduction is a fixed dollar amount that varies based on factors like filing status, while itemized deductions allow for a more customized approach by adding up specific eligible expenses, such as medical costs, mortgage interest or charitable donations. A financial advisor who specializes in tax planning could also help optimize your finances to lower your tax liability.

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What Is the Standard Deduction?

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The standard deduction is a set amount that reduces a taxpayer’s taxable income, available to most individuals when they file their federal income tax returns. This deduction requires no supporting documentation, making it a straightforward option for those who do not have significant itemizable expenses.

","

The standard deduction amount is adjusted annually for inflation and is determined by one’s filing status—single, married filing jointly, head of household or married filing separately. The simplicity of the standard deduction often makes it an attractive choice for taxpayers who either do not qualify for numerous itemized deductions or find that their qualifying expenses fall below the set threshold.

","

Filing Status	2024 Standard Deduction	2025 Standard Deduction
Single	$14,600	$15,000
Married Filing Jointly	$29,200	$30,000
Head of Household	$21,900	$22,500
Married Filing Separately	$14,600	$15,000

","

In addition to the standard deduction, taxpayers who are age 65 or older or blind can be eligible for an extra deduction amount. This additional deduction varies based on filing status and the specific condition(s) of the taxpayer. For the 2024 and 2025 tax years, the extra standard deduction amounts are as follows:

","

Filing Status	2024 Standard Deduction	2025 Standard Deduction
Single or Head of Household	$1,950	$2,000
Married Filing Jointly	$1,550 per spouse	$1,600 per spouse
Married Filing Separately	$1,550	$1,600

","

If a taxpayer is both 65 or older and blind, they can claim both additional amounts, effectively doubling the extra deduction. These additional deductions help further reduce taxable income, providing tax relief to eligible individuals.

","

What Are Itemized Deductions?

","

Itemized deductions allow taxpayers to deduct specific expenses from their taxable income instead of taking the standard deduction. This approach can be advantageous if total eligible expenses exceed the standard deduction amount.

","

Common expenses that qualify as itemized deductions include:

","

Medical and dental expenses that exceed a certain percentage of adjusted gross income (AGI)
State and local taxes (SALT) up to the federal cap
Mortgage interest
Charitable contributions
Casualty losses (in federally declared disaster areas)

","

Unlike the standard deduction, itemizing requires that you provide detailed records and receipts to substantiate the deductions claimed. However, itemized deductions offer more flexibility for those with significant qualifying expenses, providing an opportunity to potentially lower taxable income beyond what the standard deduction offers.

","

When Should You Itemize Instead of a Standard Deduction?

","

","

Taxpayers often choose to itemize when their qualifying expenses exceed the standard deduction for their filing status. Itemizing often makes sense for those who have high medical expenses, substantial mortgage interest or large charitable contributions.

","

For example, in 2025, a married couple filing jointly might find that their itemizable expenses, including $15,000 in mortgage interest, $10,000 in state and local taxes and $7,000 in charitable donations, total $32,000. Since this amount is greater than the $30,000 standard deduction for their filing status, itemizing would reduce their taxable income by an additional $2,000, leading to potential tax savings.

","

Evaluating these expenses each year can help determine whether itemizing or taking the standard deduction is more beneficial.

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How to Itemize Your Deductions

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By following these steps, you can determine whether itemizing will offer a greater tax benefit when compared with claiming the standard deduction:

","

Gather receipts and records: Collect documentation for all deductible expenses, such as medical bills, mortgage interest statements, charitable contribution receipts and state/local tax records.
Fill out schedule A: Use IRS Form Schedule A to list your itemized deductions. This form is used to calculate the total amount of deductible expenses.
Compare against the standard deduction: Calculate your total itemized deductions and compare them with the standard deduction for your filing status. Choose the option that offers you the higher amount to reduce your taxable income as much as possible.
File your tax return: If you’re itemizing deductions, attach Schedule A to your Form 1040 when filing your tax return. Ensure all supporting documentation is organized in case of an IRS audit.

","

How Will the Standard Deduction Change in 2026?

","

The 2026 standard deduction could change dramatically. The Tax Cuts and Jobs Act (TCJA) significantly increased the standard deduction, but these changes are set to expire after tax year 2025 (filed in 2026). For 2026, unless Congress extends the provisions, the standard deduction will revert to lower pre-TCJA levels, which means that taxpayers may see a reduction in the amount they can deduct automatically.

","

It is likely the deduction amounts will return to approximately half of what they are in 2026, reducing the overall benefit for many filers. This change will make it more advantageous for some taxpayers to consider itemizing again, especially if their qualifying expenses are substantial. Planning ahead and understanding how these shifts will impact your tax situation can help in making informed decisions about deductions.

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Bottom Line

","

","

Whether you’re opting for the simplicity of the standard deduction or the potential savings from itemizing, making an informed decision can lead to reduced taxable income and a better tax outcome. Keeping track of expenses and staying updated with tax law changes will help maximize deductions and minimize taxes owed.

","

Tax Planning Tips

","$4a","

Photo credit: ©iStock.com/dtephoto, ©iStock.com/Korrawin, ©iStock.com/yasindmrblk

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When an individual or business owes taxes to the Internal Revenue Service (IRS), settling the entire amount in a single payment may not be financially feasible. In such cases, a tax payment plan can offer a viable solution. This arrangement with the IRS allows taxpayers to pay their due taxes over an agreed period, easing […]

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","

A financial advisor with tax expertise can help you optimize your tax strategy and potentially save you money. Connect with a fiduciary advisor today.

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How Payment Plans for Taxes Work

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If you’re reviewing your finances and realize that you have a more substantial tax bill than anticipated, a tax payment plan could be a structured solution. This is designed to help individuals and businesses in such predicaments.

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Tax payment plans can help alleviate some financial pressure by allowing a taxpayer to distribute their debt in manageable increments over time. They also prohibit the IRS levying your assets and garnishing your wages. Levies are legal seizures of property to satisfy a tax debt, while garnishments allow the IRS to take a portion of a taxpayer’s income.

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For example, imagine that you operate a small business and suddenly realize that you owe $7,500 in taxes. Paying this amount in full could significantly impact your business cash flow. By setting up a tax payment plan, you can spread out your payments and maintain your business operations without a financial disruption.

","

When setting up a payment plan, taxpayers can opt for either a short- or long-term plan based on how soon they think they can repay their debt. A short-term plan requires the outstanding balance to be paid within 180 days. However, there are no setup fees associated with these plans.

","

A long-term plan on the other hand is an installment agreement that requires monthly payments to be made. Unlike a short-term plan, the IRS charges setup fees for establishing a long-term plan, which can vary based on how you apply and how you plan to make your payments.

","

Taxpayers with long-term payment plans can:

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Set up automatic monthly payments from their checking account (Direct Debit)
Make direct manual payments from their checking or savings account (Direct Pay)
Use the Electronic Federal Tax Payment System (EFTPS)
Make monthly payments by check, money order or debit/credit card

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Lastly, it’s important to note that whether you opt for a short- or long-term payment plan, your balance can accrue penalties and interest until it’s paid.

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Setting Up a Tax Payment Plan

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","

Before setting up a tax payment plan, you’ll want to assess your tax liability and determine the full amount that’s owed, including taxes, penalties and interest.

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From there you can apply for either a short- or long-term plan and pay the requisite setup fees. You’ll want to review your payment plan and stick to the defined schedule, if you have one. Finally, the IRS allows you to adjust and revise your payment plan if needed.

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Here’s a closer look at the process of setting up a tax payment plan:

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1. Apply for a Payment Plan

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The IRS offers several ways to request a payment plan. You can apply for one online, by phone or mail, or request one in person.

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Online: Use the IRS’s Online Payment Agreement Tool
Phone: Call 800-829-1040 (individual) or 800-829-4933 (business), or the phone number on your bill or notice
Mail: Submit Form 9465, Installment Agreement Request to the IRS

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However, there are certain restrictions for who can apply for a payment plan online. To apply for a short-term payment plan online, you must owe less than $100,000 in combined taxes, penalties and interest. Meanwhile, you must owe $50,000 or less in combined taxes penalties and interest to qualify for a long-term payment plan online. All of your tax returns must also be filed.

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2. Pay Setup Fee

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Your setup fee can vary based on the type of plan you enroll in, how you apply for it and how you’ll ultimately make your payments. While short-term payment plans do not have a setup fee, long-term plan applicants should carefully consider their options, which are illustrated in the following table:

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Long-term Payment Plan Setup Fees

","

Payment Option	Setup Fee
Automatic monthly payments (Direct Debit)	Online application: $31 Phone, mail or in-person application: $107 Low-income application: Fee waived
Direct Pay, EFTPS, monthly payment by check, money order or card	Online application: $130 Phone, mail or in-person application: $225 Low-income application: $43 (may be reimbursed

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3. Review Your Payment Plan

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Reviewing payment plan terms is critical. Taxpayers should periodically review their plan, not only when they first agree to it. This ongoing review is crucial to adapting to any changes in financial circumstances and avoiding the accumulation of additional interest and penalties.

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A step-by-step checklist for this process may include:

","

Confirming payment amount: Know the exact amount of each installment.
Checking due dates: Note all due dates, perhaps marking them on a calendar or setting reminders.
Understanding interest and penalties: Acknowledge the impact of interest and penalties on the total amount paid over time.

","

4. Make Your Payments

","

How you make your payments may depend on how much money you owe the IRS. Individuals who apply for a payment plan online must make their payments via Direct Debit (automatic payments from a checking account) if their balance is over $25,000. Businesses that apply for a payment plan online must do the same if their balance is more than $10,000.

","

5. Revise Your Payment Plan If Needed

","

If your financial circumstances change, contact the IRS to discuss potential adjustments to the payment plan. You can also revise your plan online using the ID.me system.

","

Bottom Line

","

","

Tax payment plans serve as a lifeline for those daunted by an unexpected tax bill. These plans can help taxpayers distribute their debt across a manageable timeline while mitigating the risk of severe financial disruption. You can apply for a payment plan online, by phone or mail or apply in person. However, you may owe a setup fee, as well as penalties and interest.

","

Tax Season Tips

","$5d","

Photo credit: ©iStock.com/vitapix, ©iStock.com/Pekic, ©iStock.com/urbazon

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\n","featuredImage":{"id":"cG9zdDoyNDEwOTI=","databaseId":241092,"altText":"A mother and daughter calculating the interest for a gift loan.","date":"2024-03-13T03:25:32","fileSize":224610,"mimeType":"image/jpeg","modified":"2024-03-22T13:12:37","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/03/iStock-1347451317.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-3-22","readable":"March 22, 2024"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxMzY=","databaseId":136,"userId":136,"avatar":{"url":"https://secure.gravatar.com/avatar/1d295f71ad5f26fc505155b8d7e5e2a0?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Jeff is a Writer/Editor for SmartAsset. He's an expert in a variety of personal finance topics, such as investing, banking and retirement. Jeff has received his JD and MBA and has been featured in a number of publications, such as Investopedia, The Street, Forbes, Yahoo! Finance and more. 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A gift loan is essentially a loan with an interest rate well below the market average, or even no interest at all, which can be a strategic way to support family members financially or for estate planning purposes. As beneficial as these loans may appear, with their potential tax benefits and flexible repayment options, they demand a clear understanding of the legal and financial requirements involved as they can be classified as gifts. A financial advisor can help you determine the way you need to structure any gifts or loans that you might be considering.

","

What Is a Gift Loan?

","

A gift loan is a financial arrangement that straddles the line between a gift and a traditional loan. It’s a loan given at an interest rate below the market average, or sometimes, with no interest at all. This crucial feature distinguishes it from conventional loans, where interest rates reflect current market conditions. You might be giving, or receiving, a loan without realizing that it may be classified as a gift. That can have big tax implications.

","

This type of loan is commonly used to offer financial support to family members without the stringent conditions of a bank loan. And in terms of estate planning, gift loans can also be a strategic way to transfer wealth to heirs while maintaining control over assets.

","

Generally, a gift loan can offer potential tax benefits and flexible repayment options:

","

Tax advantages: By structuring the transaction as a gift loan, the donor may utilize gift tax exemptions or deductions that could potentially reduce their taxable estate.
Flexible repayment: The borrower enjoys flexibility in repayment terms, which can be tailored to their financial situation, including no repayment obligation if the loan is structured as an outright gift.
Income tax savings: Depending on the arrangement, the borrower may also benefit from reduced income tax liabilities when compared with traditional loans, especially if the interest rate is below market rates or if interest payments are waived entirely.

","

You should note, however, that in some circumstances you could be offering a gift loan to someone without realizing that it could be taxed as a gift. And that can create a financial issue for the borrower, and potentially for you.

","

Gift Loan vs. Gift vs. Loan

","

While a gift loan involves lending money to a family member or friend with the intention of repayment, a gift generally entails transferring assets or money to another person without the expectation of repayment.

","

The IRS may view the forgone interest on a loan you provide as a taxable gift, especially if you don’t require interest to be paid on the loan you’re providing. However, the annual gift exclusion could exempt the lender from gift tax obligations if the amount is within the allowed limit, which is currently $18,000 for the 2024 tax year.

","

When compared with a traditional loan, a gift loan may offer more flexible terms and potential tax benefits. Traditional loans typically require repayment with interest according to predetermined terms and conditions, without the same potential tax advantages or flexibility in repayment options.

","

Understanding Interest Income in Gift Loans

","

","

Imputed interest refers to interest that is not paid, but is considered to have been earned for tax or accounting purposes. It typically arises in situations where a transaction involves a loan or financing arrangement with below-market interest rates or no interest charged at all.

","

The IRS has specific regulations concerning gift loans and the reporting of interest income, which are aimed at preventing the avoidance of income tax through undercharged loans. Any actual interest received, as well as the interest that would have accrued at the market rate, must be reported.

","

To illustrate how this works, let’s say you lend $10,000 to a sibling with no interest for one year. If the applicable federal rate (AFR) is 3%, the foregone interest you should report is $300. This calculation is vital for lenders to understand, as it affects the assessment of the gift loan’s benefits and the lender’s taxable income.

","

How to Prepare Your Taxes for Potential Gift Loans

","

If you’re considering a gift loan, you’ll want to keep thorough records, including a formal written agreement that outlines the loan terms so that you can report anything that needs to be reported.

","

If the gift loan surpasses the annual exclusion limit, filing Form 709 becomes mandatory. Income from imputed interest must be reported using Schedule B (Form 1040), “Interest and Ordinary Dividends,” and in some cases, Schedule 1 (Form 1040), “Additional Income and Adjustments to Income.”

","

Additionally, if the loan is tied to an investment that yields income, the lender may benefit from an interest deduction on Schedule A (Form 1040), “Itemized Deductions.” So, for example, if a gift loan is used to buy a rental property, the interest on that loan could potentially get deducted by the lender as an investment interest expense.

","

Bottom Line

","

","

A loan you make to a loved one might actually be considered a gift if you don’t charge enough interest. Therefore, you should understand the potential tax consequences, including applicable federal rates and the proper use of tax forms like Schedule B and Form 709.

","

Tips for Tax Planning

","$70","

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\n","featuredImage":{"id":"cG9zdDoyNzAzNDY=","databaseId":270346,"altText":"A taxpayer comparing W-8 vs. W-9 forms.","date":"2024-12-05T12:37:32","fileSize":432295,"mimeType":"image/jpeg","modified":"2024-12-05T12:40:14","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/12/iStock-1270893721.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-12-5","readable":"December 5, 2024"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjo5Mw==","databaseId":93,"userId":93,"avatar":{"url":"https://secure.gravatar.com/avatar/04483497dbd73f712b504e401c9c7d22?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Mark Henricks has reported on personal finance, investing, retirement, \r\nentrepreneurship and other topics for more than 30 years. His freelance \r\nbyline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. 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IRS forms W-8 and W-9 serve distinct purposes in the tax system and are used by different groups to fulfill their tax obligations. A W-8 form is typically required from non-U.S. individuals or businesses to certify their foreign status and can enable filers to claim full or partial exemption from certain U.S. withholding taxes. In contrast, a W-9 form is for U.S. taxpayers, such as freelancers or contractors, and is used only to provide businesses paying them with their taxpayer identification number (TIN). These two forms help ensure accurate tax reporting and compliance for those who need to clarify their residency status or tax obligations.

","

A financial advisor can help you reduce your tax liability by creating a tax plan for your portfolio.

","

What Is Form W-9?

","

Form W-9 is an official request for a taxpayer identification number (TIN) and other basic information. It may be requested from U.S. persons, including individuals, partnerships, corporations, estates or trusts.

","

Typically, businesses use this form to gather necessary details from independent contractors, freelancers or vendors. The information allows them to correctly report payments to the Internal Revenue Service (IRS). There is a threshold for when a W-9 is required. When a company pays non-employee compensation of $600 or more within a year to any individual or company, it must complete a 1099-NEC form and needs the information in the W-9 to do that.

","

The W-9 form itself is relatively brief and asks only for a few key pieces of information:

","

Name
Business name (if applicable)
Address
TIN (This can be a Social Security Number for individuals or an Employer Identification Number for businesses.)

","

There is also a certification section where the individual affirms that the information is accurate and that they are not subject to backup withholding unless indicated otherwise. Backup withholding only applies to some cases.

","

One of these cases occurs when the taxpayer fails to provide a correct TIN. Another time is if the IRS has flagged them for underreporting income. In either case, a percentage of their payments is withheld to cover potential tax liabilities. Form W-9 is not submitted to the IRS directly. It goes to the entity that requests it.

","

What Is Form W-8?

","

Form W-8 is used by foreign individuals and businesses to certify their non-U.S. status and to claim tax treaty benefits, if any are available, for income received from U.S. payers. The purpose of the form is to inform the entity making payments that the recipient is not subject to the same tax withholding requirements as a U.S. taxpayer.

","

Completing a W-8 can let non-U.S. individuals and entities reduce or eliminate U.S. withholding tax on income. Relevant income includes dividends, interest, royalties and other forms of passive income sourced in the United States.

","

Types of Form W-8

","

","

There are several versions of Form W-8, each serving a different purpose:

","

Form W-8BEN: Used by foreign individuals to certify their foreign status and claim tax treaty benefits,
Form W-8BEN-E: Used by foreign entities, such as corporations or partnerships, to claim tax treaty benefits.
Form W-8ECI: Used when income is effectively connected with the conduct of a trade or business within the United States. This may qualify income for a lower tax rate.
Form W-8EXP: Used by foreign governments, international organizations, foreign central banks or tax-exempt organizations to claim exemption from withholding.
Form W-8IMY: Used by intermediaries, such as foreign partnerships or trusts, to certify that they are receiving income on behalf of other individuals or entities.

","

The W-8 forms help ensure that income is taxed appropriately under U.S. law, while also allowing non-U.S. persons to take advantage of treaty benefits. These benefits can be significant, since many treaties call for less than the default 30% withholding rate.

","

These forms are kept on file by the withholding agent for as long as the payment relationship continues. Unlike Form W-9, W-8 forms have an expiration date and must be resubmitted every three years or whenever circumstances change. A move to the U.S. or another foreign country, for example, would require a new submission.

","

W-8 vs. W-9 Tax Form: Key Differences

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Form W-8 and Form W-9 address distinct requirements for taxpayers based on their residency status, tax reporting obligations, withholding rates and renewal processes.

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Residency Status

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Form W-8 is used by foreign individuals and entities to certify that they are not U.S. residents for tax purposes. Form W-9 is used exclusively by U.S. persons—citizens, resident aliens, or domestic entities.

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Tax Reporting Requirements

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Form W-8 helps foreign individuals and businesses certify their eligibility for tax rate reductions or withholding exemptions under applicable tax treaties on U.S.-sourced income. Form W-9 is used by U.S. persons to provide their taxpayer identification number (TIN) to entities that pay them so that this compensation is correctly reported to the IRS.

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Withholding Tax Rates

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For non-U.S. persons who complete a W-8, the default withholding rate is typically 30%, although this can be reduced if a tax treaty exists. For U.S. persons completing a W-9, there is generally no withholding tax applied to most types of income. However, backup withholding at a rate of 24% may apply if the individual is flagged by the IRS or fails to provide accurate information.

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Expiration and Renewal

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Form W-8 expires and typically needs to be renewed at least every three years, depending on the circumstances. Form W-9 does not have an expiration date. Once submitted, it remains valid indefinitely unless the individual’s circumstances change—such as a change in residency or taxpayer identification number.

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Bottom Line

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Form W-8 and Form W-9 play distinct roles for taxpayers based on their residency status and tax obligations. Completing the relevant form can help you report income accurately and make sure that it gets taxed accordingly. This can result in tax benefits such as reduced withholding rates, while avoiding potential complications, delays and added costs.

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Tips for Tax Planning

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