The scent of spring is in the air which can only mean one thing – it’s tax season! While trying to understand the ins and outs of filing taxes can feel like learning another language, there are really only a few key terms you need to know. One of these is the standard deduction. What is the standard deduction and how can it help you save big bucks on your taxes? Read on!
What Is a Deduction?
Before we get into the standard deduction, let’s review a few basics. The more taxable income you report, the higher your tax bill will be. Various deductions allow you to effectively lower the amount of money you’ve earned which counts as taxable. You’re allowed to deduct expenditures related to registered charitable causes, property taxes, mortgage payments and more. And then, of course, there’s the standard deduction.
The Standard Deduction
To reduce the tax burden on everyone, the IRS allows all taxpayers to apply a standard deduction to their tax bill. For the 2021 tax year (which applies to the current tax filing period, in spring 2022), the standard deduction is $12,550 for individuals, $25,100 for married couples filing jointly, and $18,800 for people filing as a Head of Household – meaning they are a single adult with at least one dependent.
An additional factor to consider is that the standard deduction is higher for people 65 and over, and those who are blind. If you fit into either of these categories, your 2021 standard deduction rises by $1,700 if you are single or a Head of Household. On the other hand, for a couple that is married and filing jointly, the standard deduction increases by $1,350 if either spouse is over 65, and by another $1,350 if either spouse if blind. A standard deduction may also increase if you were a victim of a federally declared disaster, such as a hurricane, wildfire or earthquake.
Why Decline the Standard Deduction?
You’re not required to take the standard deduction, but many taxpayers find that this is both the simplest option, and the option that saves them the most money. The alternative is to itemize your expenses. Itemizing is usually more time-intensive than simply opting for the standard deduction – but it could reduce your taxable income more than the standard deduction, depending on the specific circumstances of your past financial year.
One reason some people decline the standard deduction is because they’ve made sizable donations to registered charities. Similarly, ending the year with significant out-of-pocket medical expenses, or paying a large sum in mortgage interest or property taxes, could mean that itemizing these expenses will result in a bigger overall reduction in taxable income.
What Doesn’t Need to Be Itemized?
If you do claim the standard deduction, you can still deduct some additional expenses from your taxable income, without needing to itemize these. Applicable deductions you can take advantage of include student loan interest, contributions to an Individual Retirement Account (IRA), alimony payments, and some educator expenses if you work as a teacher.
Final Thoughts
It pays to take the time and calculate whether or not the standard deduction is your best tax strategy. You can do a quick estimate with tools online, or write out the equations yourself. Finally, any tax software or e-filing system will help you make the calculations and determine which method – whether standard deduction, or itemization – will most effectively reduce your taxable income and save you more money.
