Most tax filers look for every opportunity to reduce what they owe the IRS. And one of the biggest ways to reduce your tax bill is to be smart about the deductions you claim.
You'll have the choice between two options when you decide how to structure your deductions: You can itemize, or you can claim the standard deduction.
You don't want to make the wrong choice and be taxed on more income than you should, so you need to know how much the standard deduction is worth. While the amount depends upon your filing status, there's some good news for every tax filer -- the standard deduction will be higher in 2020.
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How much is the standard deduction going up?
The table below shows the increase in the standard deduction from 2019 to 2020 for each tax filing status.
|
If your filing status is: |
Your standard deduction rose by this much compared to 2019: |
It's now: |
|---|---|---|
|
Single |
$200 |
$12,400 |
|
Head of household |
$300 |
$18,650 |
|
Married filing jointly |
$400 |
$24,800 |
|
Married filing separately |
$200 |
$12,400 |
Table source: IRS
How does claiming the standard deduction work?
If you claim the standard deduction, you'll subtract this amount from your income to determine how much money you're taxed on.
- If your income was $20,000 and you file as single, subtract $12,400 from $20,000. You'll be taxed on just $7,600.
- If you file as married filing jointly and your combined taxable income was $50,000, subtract $24,800 from $50,000. Your taxable income comes down to $25,200.
When you claim the standard deduction, most other deductions are off limits. You can't also take a deduction for charitable contributions, for example, or for property taxes or mortgage interest. If the deductions you have for specific expenditures exceed your standard deduction, you'd want to itemize instead of claiming the standard deduction.
There are a few deductions you can still claim along with the standard deduction though. You can still claim deductions for IRA contributions, for student loan interest, and for contributions to a health savings account.
So if you are married filing jointly, you made $3,000 in tax deductible contributions to an IRA, and you're eligible to claim the full $2,500 deduction for student loan interest, you could deduct a total of $30,300 from your taxable income.
When you take a deduction, you simply reduce the amount of income you are taxed on. If you have $30,300 in deductions and your household income was $50,000, you'd only be taxed on $19,700 of that income.
Deductions are different from, and not as valuable as, tax credits which provide a dollar-for-dollar reduction in the tax owed. While a deduction lowers your tax bill because you don't pay tax on the deducted income, a credit wipes out a portion of tax you'd otherwise owe. If you owe $5,000 in taxes and take a $2,000 credit, you'll now only owe $3,000.
Millions of taxpayers will benefit from the higher standard deduction
The standard deduction is quite high so many taxpayers find it's better to claim it than to itemize. All of these taxpayers will benefit from the increase in the standard deduction.
While these increases generally occur every year to keep pace with inflation, it's still nice to know that you'll be able to subtract a little more from your taxable income in 2020 than in the past.
