When you file your federal tax return, you can reduce your taxable income in one of two ways: by taking the standard deduction or by itemizing your deductions. You can't do both, so choosing the one that gives you the larger deduction can lower your tax bill. For many people, the choice is simple, but for others, it's worth a closer look.
The standard deduction is a fixed dollar amount that reduces your taxable income. The amount depends on your filing status, such as single, married filing jointly or head of household, and it's adjusted for inflation each year. Taxpayers who are 65 or older, or blind, can claim an additional standard deduction amount.
What itemizing includes
Itemizing means listing specific deductible expenses on Schedule A. Common itemized deductions include mortgage interest on a qualified home, state and local taxes such as income or sales taxes and property taxes, charitable contributions and medical and dental expenses that exceed a percentage of your adjusted gross income. The deduction for state and local taxes is subject to a cap.
The rule is straightforward: if your total itemized deductions are greater than your standard deduction, itemizing will usually save you more. If they're smaller, the standard deduction is the better choice. Most taxpayers today take the standard deduction, but homeowners with significant mortgage interest, generous donors and those with large medical expenses may benefit from itemizing.
Some taxpayers use a strategy called bunching. Instead of making charitable gifts every year, they combine two or more years of donations into a single year, allowing them to itemize that year and take the standard deduction in other years. A donor-advised fund can make this easier, since you can contribute in one year and recommend grants to charities over time.
Keep in mind that some tax breaks are available whether or not you itemize. These above-the-line deductions, such as contributions to a traditional IRA or health savings account and certain student loan interest, reduce your income before you choose between the standard deduction and itemizing.
Keep good records either way
Even if you usually take the standard deduction, it's worth keeping records of mortgage interest, property taxes and donations. Your situation can change from year to year, especially after buying a home, making a large gift or facing major medical bills.
Tax Pay Advisor helps taxpayers in Little Rock and throughout Arkansas compare their options and choose the approach that saves the most. Contact us for a personalized deduction review.