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Filing Tax Return: Itemized or Standard Deduction

Tax Return Forms

There are numerous tax preparation products and services that will allow you to prepare and submit your tax return. Your income tax return is due by April 15th of the following year. For example, your tax return for 2024 will be due April 15, 2025. When you file your return, you will be given the option to take the standard deduction or to itemize your deductions. While the tax preparation software you utilize will be able to provide a comparison of whether itemizing or taking the standard deduction is more beneficial, you need to have a fundamental understanding of both methods to avoid overpaying on taxes and potentially receive a tax refund.

Whether you utilize the standard deduction or itemize your deductions, the amount of the deduction is subtracted from your adjusted gross income (AGI). The AGI indicates your gross (pre-tax) income less any adjustments. Once your standard or itemized deduction is removed from the AGI, the final value is your taxable income. It is the taxable income that will determine which tax rate to which you are subject. Since the United States Internal Revenue Service (IRS) employs tax brackets, your tax rate varies depending on the amount you earn. As of 2024, the lowest tax bracket is 10%, and the brackets progressively increase up to 37%. Therefore, by utilizing the greater deduction, whether that is the standard deduction or itemized deduction, you will lower your tax liability.

Standard Deduction

The standard deduction is a set amount that any individual can deduct. It is the simplest way to determine your taxable income because it requires no calculations. Rather, your standard deduction amount is determined by your filing status (single, head of household, or married). As of 2024, the standard deduction amounts are as follows: $14,600 (single), $29,200 (married), and $21,900 (heads of household). Therefore, if you were a single filer utilizing the standard deduction and your AGI is $46,000, then your taxable income will be $31,400 after subtracting the standard deduction of $14,600. Of this amount, the first $11,600 would be taxed at 10%, and the remaining $19,800 would be taxed at 12% (based on 2024 tax rates). In general, if you do not own real estate, do not have considerable charitable contributions, and do not have substantial medical expenses, then you will typically benefit more from taking the standard deduction. However, always calculate the value of each before making your decision.

Itemized Deduction

Itemizing your deductions is a more time-consuming and deliberate process. It requires that you keep organized records of your expenses to support anything that you itemize. What does it mean to itemize deductions? When you itemize, you are outlining all the qualifying deductions and adding those deductions together to determine the total amount that will be subtracted from your AGI. According to the IRS, you can claim the following itemized deductions:

  • State and local income or sales taxes.
  • Real estate and personal property taxes.
  • Interest on your home mortgage.
  • Contributions to qualified charities.
  • Personal casualty and theft losses from a federally declared disaster.
  • Unreimbursed medical and dental expenses if the amount exceeds 7.5% of AGI.

If you look at this list of qualifying itemized deductions and determine that you have few (if any), then itemizing may result in a higher taxable income than the standard deduction. Remember that your itemized deductions must be made within the taxable calendar year. If you are filing your taxes for 2024, then a charitable contribution made in December of 2023 cannot be considered. Keep this in mind because if you anticipate a large qualifying medical/dental expense or charitable contribution early in the following year, it may be beneficial to adjust your schedule to have the qualifying deductions fall within the current tax year. Additionally, under standard circumstances, you can be audited up to three years after filing a report. Certain exceptions increase this period for which you are subject to audits to six years. Therefore, you must maintain the tax records appropriately. It is recommended that you have the records backed up as well in case the original records are damaged, lost, or destroyed. This can quickly be accomplished by copying the digital records to a secondary storage medium.

Conclusion

When filing your taxes, you can reduce your taxable income by claiming either the standard deduction or itemized deduction. Generally, you want to reduce your taxable income as much as possible, which means you will choose to utilize the larger of the two deduction types. The IRS has specific categories of expenses that can be claimed as itemized deductions. Therefore, if you are unable to claim these deductions, the standard deduction will result in a lower taxable income. Utilizing the standard deduction is simple and does not require you to keep records of expenses and charitable contributions. However, it is still recommended to maintain these records for your personal use and to determine whether itemizing is more beneficial. In contrast, you will want to maintain these records when filing itemized deductions in the event that you are audited by the IRS up to six years later (under exceptional circumstances). Be sure to understand how your taxable income is calculated and utilize the deduction method that meets your financial objectives.