intro to Tax deductions

A tax deduction lowers the amount of your overall income that is subject to tax. For example, if you have $40,000 in taxable income for the year and you claim a $5,000 deduction, then your taxable income is reduced to $35,000 ($40,000 - $5,000). Now let's assume you have an effective tax rate of 10%. By taking the $5,000 deduction, your tax bill will be $3,500 ($35,000 x 10%) instead of $4,000 ($40,000 x 10%). Therefore, the $5,000 deduction saves you $500 on your tax bill.

 

Most taxpayers have the choice of either taking the standard deduction or itemizing deductions.​ You may use whatever option results in a lower tax liability. Note, though, if you itemized your deductions in prior years, you may want to review whether doing so is still the better option---a recent tax law change significantly increased the standard deduction amount for everyone. Most tax preparation software will let you know whether it is more beneficial to take the standard deduction or itemize your deductions.

 

Use the information below to help understand which option might be best for your specific situation.

 

Standard Deduction

The standard deduction is a pre-determined, fixed dollar amount set by the IRS that fluctuates slightly year-to-year based on inflation. The standard deduction amount changes based on: (a) your filing status; (b) whether you are 65 years of age or older (or blind); and (c) whether another taxpayer can claim you as a dependent. 

2020 Standard Deduction Amounts:

$12,400 - Single Filers

$24,800 - Married, Filing Jointly or Qualifying Widow(er)

$12,400 - Married, Filing Separately

$18,650 - Head of Household

 

You cannot use the standard deduction if you are either:

  • A married individual filing as married filing separately whose spouse itemizes deductions;

  • An individual who files a tax return for a period of less than 12 months (this could be due to a change in their annual accounting period); or

  • An individual who was a nonresident alien or a dual-status alien during the year. However, nonresident aliens who are married to a U.S. citizen or resident alien can take the standard deduction in certain situations. For more information, see IRS Publication 519 (U.S. Tax Guide for Aliens).

 

Itemized Deductions

Itemized deductions are eligible expenses that taxpayers may claim on their federal tax return that decrease the amount of income subject to tax. You will want to itemize your deductions if doing so would produce a higher deduction amount than the standard deduction.

 

You may benefit by itemizing deductions for things that include:

  • State and local income or sales taxes;

  • Real estate and personal property taxes;

  • Mortgage interest;

  • Mortgage insurance premiums;

  • Personal casualty and theft losses from a federally declared disaster;

  • Donations to a qualified charity; and/or

  • Unreimbursed medical and dental expenses that exceed 7.5% of adjusted gross income.

 

Certain itemized deductions are subject to special limitations. For more information, see the IRS Instructions for Schedule A (Itemized Deductions).

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