Your goal in filing your taxes should be to report your income accurately to avoid problems with the IRS -- but it should also be to score the highest refund as possible, or pay the IRS as little as possible. To that end, you'll need to figure out whether it pays to itemize on your upcoming tax return or claim the standard deduction. Here's how to make that call.
It's all about the numbers
First, let's get one thing out of the way. Itemizing won't increase your chances of getting audited if you do so wisely and limit yourself to legitimate deductions. For example, if you claim a $12,000 mortgage interest deduction because that's what you paid your lender last year, the IRS isn't going to penalize you.
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With that in mind, you'll need to see if itemizing even makes sense. Figuring this out involves crunching some numbers and comparing your total itemized deductions to the standard deduction you're entitled to claim. The standard deduction changes every year. For the 2020 tax year -- which is the tax year you're about to submit a return for -- here's what it looked like:
- $12,400 for single filers and married couples filing separately
- $24,800 for married couples filing jointly
- $18,650 for heads of household
Now, say you're married and file a joint tax return with your spouse. If you own a home or have various deductions that total more than $24,800, then itemizing clearly makes sense. But if your deductions don't exceed that total, then it pays to go with the standard deduction. It's that simple.
There is, however, one exception. If you're right on the cusp of itemizing versus claiming the standard deduction, you may opt to stick with the standard deduction because it makes filing easy. Say you total up your mortgage interest, state and local tax deduction (which is limited to $10,000, even if you paid a lot more), and charitable donations for 2020, and you have no other deductions to claim. If you wind up with $24,900 in deductions, you may want to stick with the standard deduction anyway. That $100 difference won't make a huge dent in your refund or tax bill (because you'd only be getting back a portion of it based on your tax rate), but it could spell the difference between being able to do your taxes yourself versus hiring someone to do them for you, thereby adding to your costs.
Keep in mind that there are certain deductions you're entitled to take even if you don't itemize your taxes. These include:
- IRA contributions
- HSA contributions
- Educator expenses
- Student loan interest, depending on your income
- Charitable donations of up to $300 (this is unique to the 2020 tax year; normally, you can only deduct charitable contributions when you itemize)
It could pay to stick with the standard deduction and claim these expenses individually, depending on your circumstances.
What's the right move for you?
Choosing whether to itemize versus claim the standard deduction is important, so run those numbers to see what makes the most sense. Getting that call just right could lower your tax debt or put a higher refund in your bank account this year.
