If you’re like most Americans, when you do your taxes, the chances are that you take the standard deduction instead of itemizing deductions. But every year, it seems that more and more people are choosing to itemize their returns. For some, this is because they have a lot of deductions to itemize—and thus reap more significant tax savings through itemizing their returns.
But others don’t trust the standard deduction and would instead take the time to itemize what they can—to spend less on taxes, even if it means more work for them.
So, what’s the right choice for you? Well, it depends, and here are four factors to consider that will help you decide.
The standard deduction is a fixed-amount deduction that reduces your taxable income—and thus your tax bill. The value of this deduction increases every year to account for inflation and has been as high as $6,100 for individuals and $12,200 for couples filing jointly in the past.
So, unless something about your financial situation radically changes year to year—or the law changes—you may be better off sticking with the standard deduction.
For instance, if you itemize deductions this year but expect similar income and expenses next year (and thus a similar tax bill), the chances are good that your itemized deductions wouldn’t be all that different.
Not surprisingly, this is one factor in favor of taking the standard deduction: You’ll likely save more money by taking it than by itemizing every year.
But the real question to ask yourself is whether you’re at least breaking even—that is, does your total itemized deductions exceed the standard deduction? If not, you’ll likely save more money in the long run by sticking with the standard deduction.
So if you have a big enough mortgage or donated a large enough amount to charity, the extra effort of itemizing may be worth it—even if it means filling out more pages on your tax return.
That said, if you have a simple tax situation with few deductions—for instance, just the standard deduction available to most people and perhaps not much else—you’re likely better off sticking with the standard deduction. Remember that claiming too many exemptions or deductions will trigger an audit of your taxes, so it’s best not to take a gamble here.
To calculate the standard deduction for a particular year, take your filing status (such as single or married filing jointly) and subtract the number in that status from the applicable “personal exemption” amount ($4,050 for individuals and $8,100 for couples). For example, if you’re a single filer, subtract $4,050 from $6,100 to find that the standard deduction is $1,050.
But another factor in favor of itemizing—the sheer number of deductions you have to report—may not be a good reason in and of itself. Most people can take some standard deductions without going through a cumbersome process: charitable donations, mortgage interest, and state and local taxes.
You can add these deductions up in a matter of minutes without breaking a sweat—or your wallet—and still come out with a total greater than the standard deduction. And it’s worth noting that even though most people have few deductions to report, you’re more likely to trigger an audit if you take too many deductions.
So, if you’re tempted to itemize because you have a lot of deductible expenses, be sure that the added time and effort of itemizing won’t be more than offset by potential savings—or lost refunds—if you’re audited.
As with most questions about taxes, the answer depends on your situation. Take a look at your financial picture and see how it all shakes out. It may be that sticking with the standard deduction is the way to go, or it might make sense for you to adjust your tax strategy from year to year—and maybe even prepare your taxes more than once!
In the end, figuring out which route to take can be complicated, but it’s a good idea to decide before tax season starts. After all, you want to avoid last-minute scrambling and possible oversights that could leave money on the table—or land you in hot water with the IRS!
Don’t want to be bothered with tax preparation and all the stress that comes with it? The Oasis Firm can take care of all the documents and filing for you. We’ve got you covered every step of the way! Call us at 833-886-2747!
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