Tax Return 1040: Standard Deduction vs Itemized Deduction

Tax Return 1040: Standard Deduction vs Itemized Deduction

Tax Return for Individuals (in USA) Form 1040 provides option of selecting Deductions from income either Standard or Itemised. The Standard deduction is a fixed amount that reduces the income you’re taxed on but for itemized deductions, you need to keep track of what you spent during the year on deductible expenses. Itemized deductions are made up of a list of eligible expenses only. You can claim either standardized or itemized deduction in your tax return 1040.

1) Standard Deduction

The standard deduction is a fixed set of amount that the Internal Revenue Service (IRS) lets you deduct from your taxable income. Factors like your filing status and age determine the amount.

2020 Standard Deduction Amounts:

At the end of the tax year, anyone aged 65 or older and Blind individuals can take the additional standard deductions as well.

The standard deduction helps to:

• Eliminated the need of the itemized deductions
• Allows you to take the deduction even if there is no expenditure that qualify for the itemized deductions
• Avoid keeping records and receipts of your expenses in case you’re audited by the IRS

2) Itemized Deduction

Itemized deduction allows you to bypass the standard deductions and deduct the actual expense you paid during the year rather than going with the government’s estimate. It takes the more work to itemize the deductions, but the payoff is sometimes well worth in effect.

Major Deductions you can itemize:

• Medical Expenses –

If you itemize the deductions, you may be able to deduct expenses you paid that year for medical and dental care for yourself, your spouse, and your dependents. You may deduct only the amount of your total medical expenses that exceed 7.5% of your adjusted gross income. Medical care expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or payments for treatments affecting any structure or function of the body.

• Mortgage Interest –

The Mortgage Interest is a common itemized deduction that allows the owners to deduct the interest they pay on any loan used to build, purchase, or make improvements upon their residence, from taxable income. The mortgage interest deduction can also be taken on loans for second homes and vacation residences with certain limitations.

• Charitable Contributions –

In most cases, the amount of charitable cash contributions, taxpayers can deduct usually 60 percent of their adjusted gross income (AGI). Qualified contributions are not subject to this limitation. Individuals may deduct qualified contributions of up to 100 percent of their adjusted gross income. Contributions that exceed that amount can carry over to the next tax year.

• Casualty and theft losses –

If you suffer property damage due to a fire, accident, or natural disaster, you may be able to claim a deduction for your loss. This category of itemized deductions used to cover a wide range of circumstances, but the Tax Cuts and Jobs Act (TCJA) changed the rules to only allow a deduction for losses from a federally declared disaster.

You can’t take a deduction for any of the losses that are covered by insurance, and you have to reduce the loss by $100 before figuring your deduction.

• Miscellaneous Itemized deductions –

If you’ve been itemizing deductions for a while, you might notice a few deductions missing from that list. The TCJA eliminated most of the miscellaneous itemized deductions, including things like investment advisory or management fees, unreimbursed job expenses, and tax preparation fees. There are still few miscellaneous itemized deductions available, including gambling losses, amortizable bond premiums, and impairment-related work expenses of a disabled person.

3) Conclusion

If you have your itemized deductions less than the amount of the Fixed Standard deductions than go for the standard deduction otherwise choose the itemized deduction.