The standard deduction is an amount that all taxpayers can deduct from their income on their tax return. The standard deduction is set each year by the IRS for taxpayers based on their filing status. This deduction is available to all taxpayers who cannot itemize deductions on their taxes, regardless of their income.
How much is my standard deduction?
The standard amount is revised periodically. For the 2022 tax year the standard deduction is:
| Filing Status | 2021 tax year | 2022 tax year |
|---|---|---|
Single | $12,550 | $12,950 |
Married filing jointly | $25,100 | $25,900 |
Married filing separately | $12,550 | $12,950 |
Head of household | $18,800 | $19,400 |
For those who are over 65 or blind there is an additional deduction that is added. For those who are both 65 or over and blind this additional deduction is doubled. If someone else can claim you as a dependent on their tax return, this will impact the amount of your standard deduction as well.
How the standard deduction works
The standard deduction is the default reduction that virtually every taxpayer qualifies for if they are not able to itemize deductions. Note that you can either itemize deductions or use the standard deduction but you cannot do both.
The standard deduction is a reduction from your taxable income as shown on your 1040 tax form. This amount will serve to reduce the final amount of income upon which your federal taxes for the given tax year will be based.
For example, if you take the standard deduction this means that you cannot deduct the interest on your home mortgage or any portion of the property taxes paid on your home. You cannot take other popular deductions for expenses such as state income taxes, medical expenses over a certain amount or charitable deductions.
Determining whether or not to use the standard deduction involves looking at these and other items that could potentially be taken as itemized deductions. If the total of these items is less than the standard deduction for your filing status then it generally makes sense to default to the standard deduction as this will result in a lower tax bill.
Standard deduction vs. itemized deductions
As discussed above, the standard deduction is an amount set for each tax year by the IRS that is based on a taxpayer’s filing status and other factors such as age, blindness, etc. There is no variation in this number and virtually all taxpayers qualify to use this as their default option if they cannot itemize deductions.
On the other hand, itemized deductions refer to specific expenses that can be listed as specific deductible items on Schedule A of your 1040 tax return. These will vary by individual. Some typical expenses that can qualify as itemized deductions include the following.
Mortgage interest
This is specifically interest paid on a mortgage used to purchase your principal residence. Interest pertaining to the first $750,000 ($375,000 if married and filing separately) of mortgage debt is deductible. The amount increases to $1 million ($500,000 if married and filing separately) if the debt was incurred prior to December 16, 2017.
Interest on a home equity line of credit is no longer deductible unless the money borrowed was used to buy, build or to substantially improve your home.
State and local taxes
This deduction typically includes state income taxes as well as property taxes or local sales taxes. The current SALT tax rules limit this deduction to a combined $10,000 annually.
Medical expenses
This deduction allows you to deduct eligible unreimbursed medical expenses in excess of 7.5% of your adjusted gross income (AGI). Unreimbursed generally means that these expenses are not covered by your medical or dental insurance. Some typical medical and dental expenses that qualify for this deduction include:
- Payments made to medical professionals such as doctors, dentists, surgeons, chiropractors, psychologists, psychiatrists and a host of other medical practitioners.
- Care given in a hospital or nursing home setting.
- Acupuncture.
- Programs to deal with addiction including quitting smoking.
- Weight loss programs in connection with a medical diagnosis.
- Prescription drugs including insulin.
- Dentures, prescription eyeglasses, contact lenses, hearing aids, crutches, wheelchairs and many other types of medical equipment.
- Transportation costs related to receiving medical care.
- Out-of-pocket premiums for medical insurance if not paid by an employer to the extent that they are paid on an after-tax basis.
Charitable contributions
Charitable contributions must be made to a qualified charitable organization as defined by IRS rules. Examples of such organizations include:
- A church, synagogue or other religious organization.
- A 501(c)(3) registered entity.
- A trust, community chest or foundation that was created in the United States where the money is used for purposes such as charity, religious purposes, scientific research, promoting literacy and other related purposes.
- Non-profit educational institutions such as universities.
- Eligible organizations combating hunger and poverty.
When in doubt, check with the IRS or a tax professional.
Charitable contributions can be made via gifts of cash, property or securities such as stocks, bonds, ETFs and mutual funds. A popular giving strategy is to donate appreciated securities whereby the donor not only receives a deduction for the value of the securities but will avoid incurring any capital gains taxes.
The ability to deduct charitable contributions is limited to a percentage of your AGI. This varies by the type of contribution made, for example donations made in cash typically have the highest percentage of deductibility. Generally any amount that cannot be used as a deduction in a given tax year can be carried over to subsequent tax years.
How to claim itemized deductions
Itemized deductions are claimed using Schedule A on your tax return. You enter the amounts on this schedule and the total will then flow through to your Form 1040 return. The amount of itemized deductions will serve to lower your taxable income in much the same way as with the standard deduction.
It is a good idea to be sure that you have sufficient documentation of the item that you are claiming as a deduction in case the IRS questions the deduction or audits your return. You will need to be able to prove that you actually spent the amount being claimed.
Examples of documentation can include:
- Copies of checks written.
- Charge card receipts.
- A letter of acknowledgement for a donation from a charitable organization.
- Tax forms from your mortgage holder such as a 1099.
- Medical bills and related documentation.
Your tax professional can provide more detail as to the types of documentation that may be needed. Not having the correct documentation could lead to a deduction being disallowed, requiring the payment of additional taxes and potentially subjecting you to penalties as well.