Last year’s Tax Cuts and Jobs Act was one of the most comprehensive tax overhauls in the last fifty years. As a result, accountants and citizens alike are working on navigating through the new procedures as they file for the 2019 tax season. One of the biggest questions is about tax deductions and which method would save people more money.
Here’s a brief rundown on standard vs. itemized deductions and the roles they play:
What is a tax deduction?
When paying your taxes, you’re usually categorized based on your overall income. Simply put, tax deductions are a way to cut down your reported income so that you fall into a lower tax bracket, and consequently, have to pay less money back to the government as a result. Deductions can come in many shapes and sizes, ranging from charitable donations to tuition fees.
For example, if you have an income of $60,000 per year, and made $5,000 worth of payments to a tax-deductible expenditure like a student loan, your adjusted reported income would be $55,000 per year. In other words, tax deductions lower your tax liability by lowering your taxable income.
As the simplest form of deduction, a standard deduction can almost be considered a sort of universal discount based on your filing status. For example, if you are the head of the household, you would get a different deduction value as compared to a married couple filing separately. Standard deductions give you the opportunity to lower your reported income even if you didn’t have any deductible items that you’ve paid for during the year. It’s a fixed dollar amount that reduces the income you’re taxed on.
The vast majority of Americans opt for this type of deduction because it’s easy to use and doesn’t require detailed record keeping. It’s a great option if you haven’t made many deductible payments over the year, but still want to save money.
Itemized deductions, on the other hand, are a bit more complex. If you opt to go this route, you are essentially choosing to skip the benefits of the standard deduction because you believe if you added up all of your deductible expenditures, it would save you more money. For example, let’s say that if you took the standard deduction, you would save $12,000 on your reported income. After adding up all of your receipts, you’ve noticed that you made $14,000 in deductible purchases. This is a situation when you would choose to make an itemized deduction when filing, as it would save you from reporting an additional $2,000.
This method of deduction can be a great money saver but takes time to do. You must be diligent enough to keep your receipts and a detailed record of your purchases throughout the year. Come tax season, you add them all up and see what the total is.
At the end of the day, the deduction method you choose should be whichever one saves you the most money. Years that you’ve made large, out of pocket payments on expenses like medical bills or your mortgage have the potential to save you a lot of money compared to just going with the standard deduction. Conversely, you may want to go with a standard deduction during times when you haven’t really made any deductible expenditures.
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