When calculating your taxable income, the IRS subtracts your exemptions and deductions from your adjusted gross income, or AGI. Taxpayers have two choices when it comes to deductions -- take the standard deduction, or itemize. Since you're allowed to use whichever option saves you the most money, it's important to know what deductions can be itemized, and whether it's worthwhile for you to calculate your itemized deductions.
What is the standard deduction?
The standard deduction is a fixed amount of money you can choose to subtract from your adjusted gross income (AGI) along with your exemptions, in order to arrive at your federal taxable income.
For the 2016 and 2017 tax years, here are the standard deduction amounts by filing status.
2016 Standard Deduction
2017 Standard Deduction
Married Filing Jointly
Married Filing Separately
|Head of Household
What does it mean to itemize?
The other option is itemizing your deductions, which means adding up all your deductible items individually, and then subtracting the total from your adjusted gross income, along with your exemptions. Taxpayers are free to use whichever method they want, and the majority of U.S. tax returns claim the standard deduction.
Itemized deductions may include, but are not limited to, the following items:
- Mortgage interest
- Property taxes (On home, car, and other property)
- Mortgage insurance (PMI)
- State sales tax or state income tax
- Medical expenses, in excess of 10% of AGI for most people
- Unreimbursed business expenses
- Charitable contributions
You can take certain deductions even if you don't itemize
It's important to point out that several well-known tax deductions aren't really deductions at all. Certain items are called adjustments to income, or "above the line" deductions, which means that they can be taken whether or not you decide to itemize.
The list changes over the years, but as of this writing, the allowable adjustments to income include student loan interest, tuition & fees, moving expenses, traditional IRA contributions, alimony paid, and educator classroom expenses.
The point is that if you have any of these, they should have no influence on your decision of whether to itemize or not.
Should you itemize, or stick with the standard deduction?
First, a disclaimer. There's no way for me to answer this question with 100% accuracy without knowing your tax situation and every single deduction you qualify for.
The bottom line is that if your individual deductions add up to a greater amount than your standard deduction, itemizing makes more sense. And while adding up each and every deduction can be rather time-consuming, one pretty accurate way to determine if you need to go through the trouble is to just look at what I call the "big three" itemized deductions. These are:
- Mortgage interest (on a first and/or second home)
- Charitable contributions
- Medical expenses in excess of 10% of your adjusted gross income
These are three of the most common itemized deductions, and for those people who can claim them, they are often the most lucrative.
So, if these three deductions add up to more than your standard deduction, or if they add up to close to that amount, it's probably a good idea to do your taxes the long way and at least compare the effect of itemizing your deductions. If you don't have these deductions, or they're a long way off from the standard deduction amount, chances are you're better off just using the standard deduction.