Standard Deduction: Who Should use it? What is it Worth?by Bryan Carey
Dec 15, 2001 (Updated Apr 12, 2009)
The Bottom Line The standard deduction is a simple way to reduce taxes, and it should be taken IF it's greater than the sum of your itemized deductions.
Today is the middle of December, and that means that tax time is quickly approaching. In just a few short weeks, we will all be receiving our W-2 forms in the mail, and the grueling task of completing our tax returns will become reality, for another tax year.
One of the decisions that needs to be made each year is whether or not to itemize deductions, or just take the standard deduction. Let's take a look at the facts and figures regarding the IRS standard deduction:
What is a Standard Deduction?:
Basically, a standard deduction is a flat, fixed amount of money that the IRS allows taxpayers to deduct from their taxable income, instead of itemizing deductions. It reduces the amount of a taxpayer's taxable income and, hence, the amount of tax owed for the year.
If you take a standard deduction, then you cannot itemize, and vice- versa. You are only allowed one of these two taxable income- reducing options. You also cannot take the standard deduction if you were a non- resident alien or dual- status alien during any part of the year, or if you filed a return for a period of less than 12 months, resulting from a change in your individual annual accounting cycle.
How Much is the Standard Deduction?:
Like other tax data, the standard deduction changes slightly from one year to the next. Barring any major change in the tax code, you can expect the standard deduction to increase each year. For the year 2001, the standard deduction amounts are as follows:
Married, Filing Jointly................... $7,600
Married, Filing Separately............... $3,800
Head of Household........................$6,650
If you are over 65, blind, or both, you are permitted to take an additional standard deduction amount. For those who are married filing jointly, married filing separately, or qualifying widower with a dependant child, an additional $1,100 can be taken for blindness, and/or for being over 65. If you are single or head of household, your additional allowance is $900 each for blindness or for being over 65 years of age.
The standard deduction for a person who can be claimed as a dependant on another taxpayer's return is computed differently. It's the larger of $700, or $250 plus the wages earned for the year, up to the maximum amount allowed for the standard deduction for that individual's filing status.
Who Should Take the Standard Deduction?:
The answer here is simple. You should use the standard deduction if the amount of your deduction is greater than the amount that you could deduct if you itemized. For example, if a single person, aged 30, has possible itemized deductions totaling $3,500, then he/she would be better off taking the standard deduction of $4,550 because this would reduce the taxable income by an additional $1,050. Depending on what tax bracket this individual is in, this extra deduction could save the taxpayer anywhere from roughly $170 to $350 dollars for the year.
Choosing between the standard deduction and itemizing is a simple task. It's just a matter of filing your taxes based on which one of the two methods will result in a lower amount of taxable income. For most of us, we are likely to start out our young working lives taking the standard deduction. Then, as our income increases, we are likely to buy property, obtain home equity loans, and engage in other tax- reducing strategies that will make itemizing deductions a more valuable alternative.
For some individuals, the taxable income is low enough that it won't make any difference whether you use the standard deduction or itemize deductions. This is especially true of single people and others who only work part time. If you taxable income is below the limit for paying Federal income tax, then it won't matter which way you go. Your taxable income will be zero, regardless of whether or not you use the standard deduction or you itemize deductions. In this instance, using the standard deduction would make the most practical sense because it makes filing much simpler.
It's important that you have your figures ready, when tax time rolls around. Add up your total itemized deductions and then compare them to the standard deduction amount, to see which one will result in the least Federal tax owed. If you're not sure what to count as an itemized deduction, then consult a tax professional, or the internet, for the needed answers. All it takes is a little preparation, and some simple math, to reduce your Federal tax burden.
For more information on federal income taxes, be sure to read the following essays:
Federal Tax Withholding
Short Term Capital Gains and Losses
Long Term Capital Gains and Losses
Capital Losses and Tax Treatment