Should You Take the Standard Deduction?

Image source: www.SeniorLiving.org via Flickr.

Saving on your tax bill can be a big hassle. But in some cases, the IRS actually tries to make things simple. The standard deduction gives millions of taxpayers an easy out when it comes to preparing their tax returns, effectively making it unnecessary to go to the time and trouble of calculating a whole host of complicated tax provisions. In some cases, though, taking the standard deduction will leave money on the table that could have gone into your pocket. Let's take a closer look at the standard deduction to see when it makes sense just to use it and call it a day.

What your standard deduction is

Standard deduction amounts are established under the tax laws and change each year in line with inflation adjustments. Baseline standard deduction amounts exist for all taxpayers based on filing status, and additional amounts are available for those who are either 65 or older or are blind.

Data source: IRS.

For instance, if you're married filing jointly and both spouses are over 65, then your standard deduction is $12,600 plus two times $1,250, for a total of $15,100.

A single filer who is blind would get a standard deduction of $6,300 plus $1,550 -- $7,850 if younger than 65, or $9,400 if 65 or older due to getting another $1,550 added because of age.

Standard deduction for dependents

There's an exception to the rules above for those who can be claimed as dependents on someone else's tax return. In that event, the standard deduction is a minimum of $1,050. However, if the dependent has earned income, then you'll need to calculate the total of that income plus $350. If that amount is higher than $1,050, then it becomes the dependent's standard deduction -- subject to the usual maximum standard deduction amount governed by the rules earlier in this article.

Special rules for married people filing separate returns

Those taxpayers who prepare their returns using married filing separately status have an additional requirement. If one spouse itemizes deductions, then the other one must itemize as well. In other words, in order for one spouse to take a standard deduction, both have to agree to do so.

Should you take the standard deduction?

In general, one simple rule governs the standard deduction: if you'd save more by itemizing, then itemize. If your itemized deductions wouldn't be as big as the standard deduction, then take the standard deduction.

However, there are several complicating factors that can make it more difficult to decide. For instance, some high-income taxpayers are required to reduce their itemized deductions by an amount based on the income shown on their tax returns, and the resulting decrease can make a standard deduction more attractive. Similarly, if you are subject to the Alternative Minimum Tax, the typical standard deduction doesn't apply to the AMT calculation, and so the standard deduction might not play any role at all in the amount of your final tax bill.

Some enterprising taxpayers make the best of both worlds, alternating between itemizing and taking the standard deduction. If you bunch up two years' worth of deductible expenses into a single year, then it can give you enough to justify itemizing even if a single year's expenses would have left you below the standard deduction. In the off year, you can simply take the standard deduction despite paying almost nothing in deductible expenses during that particular calendar year.

Knowing about the standard deduction can save you from doing a ton of work. However, if you have considerable deductible expenses, it pays to run the numbers to make sure that you're getting every penny of available tax relief in the tax strategy you follow.