Like a tax credit, a tax deduction is a type of tax break. It reduces the amount of money you owe Uncle Sam. Tax deductions lower your tax burden by lowering your taxable income and you can either claim the standard deduction or itemize your deductions when you file. If you don’t know what a standard deduction is, we’ll explain what it means in layman’s terms.
Check out our free federal income tax return calculator.
Note: In December 2017 President Trump signed a sweeping GOP tax bill that includes doubling the standard deduction into law. Under the new law, the standard deduction for single filers will rise to $12,000 and the standard deduction for joint filers will jump to $24,000. This change will not go into effect until taxpayers file their 2018 taxes in April 2019. For more on Trump’s new tax bill, see this article.
Understanding the Standard Deduction
Whether you’re a business owner or an employee, you probably want to keep your income tax bill as low as possible. That’s where tools like deductions come in. And regardless of where you stand on the financial front, there will likely be at least one expense that you can deduct from your taxes.
In fact, many costs and contributions are deductible, including charitable gifts, mortgage interest, student loan interest, some business-related costs and medical expenses. In order to claim your deductions, you’ll need to have some kind of evidence indicating that you deserve to have a portion of your income exempt from taxation. If you think keeping up with several different receipts and bank statements is a hassle, you can always use the standard deduction when you file your income tax return.
The standard deduction is simply a set amount of money that individuals can automatically subtract from their adjusted gross income. It’s not taxed and since it’s tied to inflation, the exact amount usually changes from year to year. The size of your standard deduction depends on a few factors: your age, your income and your filing status.
How Much Is My Standard Deduction?
For the 2017 tax year, which we file in early 2018, the federal standard deduction for single filers and married folks filing separately is $6,350. It’s $12,700 if you’re a surviving spouse or you’re married and you’re filing jointly. If you’re the head of your household, it’s $9,350.
Individuals who are at least partially blind or at least 65 years old get an additional standard deduction. If you’re married and filing jointly or you qualify as a widow(er), it’s worth $1,250. If you’re single, you’re married and filing separately or you’re the head of household, it’s $1,550.
Is someone else claiming you as a dependent? If so, your standard deduction amount can’t exceed the greater of either a) $1,050 or b) $350 plus your total earned income. If you live in a state that requires you to pay income taxes, there may be a state-based standard deduction that you can claim on your state tax return.
There is an IRS tool that you can use to calculate your own standard deduction. Within about five minutes, you’ll know exactly how much you can deduct from your income.
It’s important to note, however, that not everyone can use the standard deduction. Unfortunately, if you fall into any of the following categories, you’ll likely have no choice but to itemize your deductions:
- You file a tax return for a period of less than 12 months because you’re changing your yearly accounting period
- You’ve been a non-resident alien at any point during the tax year
- You’re married, filing separately and your spouse is itemizing his or her deductions
Estates, partnerships, common trust funds and trusts also aren’t eligible for the standard deduction.
Standard Deduction vs. Itemized Deduction
The difference between the standard deduction and an itemized deduction is simple. The former is a specific or standard number. But the latter requires you to manually itemize your deductions. That means you would have to sit down, review your financial documents and add up everything.
Before you pull out your calculator, though, keep in mind that there are limitations. If your income is at or above a certain threshold, there could be a cap on deductions you can claim. They also phase out at a certain level. For 2017, that threshold is $261,500 if you’re single and $313,800 if you’re married and filing jointly. It’s $287,650 if your filing status is head of household, and $156,900 if you’re married and filing separately.
Ultimately, you’ll have to decide how you want to claim your deductions. That’s because the rule is that you can’t use the standard deduction and itemize your deductions within the same tax year.
Deciding How to Claim Your Deductions
If you’re aren’t sure whether to itemize deductions or take the standard deduction, it’s a good idea to take the time to run the numbers. Whatever gives you the largest deduction is the one you should probably go for.
Remember that the actual value of your deduction depends on the tax bracket you fall into. So if you’re in the 15% tax bracket, a $2,000 deduction will only reduce your tax bill by $300. Generally, itemizing deductions makes more sense the wealthier you are. If you’re in a higher income tax bracket, the deduction provides greater savings.
Taking the standard deduction is certainly easier, especially if you haven’t been tracking your expenses over the course of the year. Most Americans choose to go that route, and you can claim the standard deduction even if there isn’t a single expense that you’d be able to deduct otherwise. Of course if you want to itemize but need help doing so, you may want to talk to a financial advisor who specializes in taxes.
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Deductions reduce the amount of money you’re have to pay by the April 15th deadline. The government sets the standard deduction and dictates its amount. All tax filers can claim this deduction unless they choose to itemize their deductions. For the 2017 tax year, the standard deduction is $6,350 for single filers and $12,700 for joint filers. Filers who have a head of household status get a deduction of $9,350. The deduction amount commonly increases to keep up with inflation, but because of the tax bill signed on 22 December 2017, the standard deduction will nearly double for the 2018 tax year (filed in early 2019).
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