You don't have much choice when it comes to whether to pay your taxes, but you can decide how to approach your tax deductions -- those allowable subtractions that can lower the amount you owe in taxes. You have two options: the standard, federally defined deduction or itemizing your deductions. The method you choose can make a big difference on your tax return.
With the April 18 tax-filing deadline just around the corner, check out the pros and cons of each deduction method to see which one is right for you.
How the Standard Deduction and Itemized Deduction Differ
The standard deduction is the government's built-in deduction that you can take while preparing your taxes. According to the IRS, for tax year 2016, the standard deduction for heads of household will be $9,300, which is up from $9,250 for tax year 2015. The standard deductions of $6,300 for single filers and married couples filing separately and $12,600 for jointly filing married couples are the same for tax years 2015 and 2016.
Itemizing is comprised of individual deductions that, when added up, can help lower the amount of taxable income you pay. Both standard and itemized deductions have their benefits and drawbacks.
Advantages of Taking the Standard Deduction
If you like to keep your taxes as simple as possible, opting for the standard deduction might be the way to go. As with all tax considerations, however, if you're unsure, you should seek the advice of a tax professional. Here are a few benefits of choosing the standard deduction.
It's easy, convenient and saves time. The standard deduction is essentially an automatic process. It's a general, preset deduction based on your taxable income that doesn't require you to devote time or energy to claiming each and every deduction, saving you the trouble of providing documentation, filing a Schedule A form or needing to understand nuances of tax law.
You might qualify for a bigger deduction. Some individuals might be eligible for an increase in their deductions based on age, disability or filing status. If you're 65 or older and/or visually impaired or fully blind, you'll be able to claim a higher deduction if you go the standard route. The standard deduction also goes up by $1,550 for single and head of household filers or by $1,250 for married or widowed taxpayers. Anyone who suffered a loss or casualty in a presidentially declared disaster zone in 2015 also can qualify for an additional standard deduction in tax year 2015.
It makes exceptions that itemized deductions don't. You'll be allowed to take a standard tax deduction even if you don't have expenses that qualify you to make itemized deductions.
Why You Might Not Want to Take the Standard Deduction
Although the standard deduction is a simple method, it might not be the best one for you. Here are some of the circ*mstances that might require you consider itemizing instead.
Standard deductions have filing limitations. You won't be able to take a standard deduction in a few cases. If you're married and filing separately, you can't claim a standard deduction if your spouse itemizes deductions. Although not as common, if you're a nonresident alien, a dual-status alien or someone who is filing a tax return for a period of less than a year, then you won't be eligible for the standard deduction. In some cases, your deduction might be limited if you've been claimed as a dependent on someone else's taxes.
You might lose money on certain deductions. The standard deductible amount might be lower than the amount you could deduct if you itemized. If you're a homeowner, for example, the standard deduction might be less than the total amount of mortgage interest or real estate taxes you've paid and could deduct. Similarly, a standard deduction might not cover all your expenses if you're a small business owner.
Benefits of Itemizing Your Deductions
If you keep good records and believe you can benefit from itemizing, it could be worth looking into. If you are confused about how to itemize deductions correctly, get help online with the tax preparation software you're using or consult a professional tax advisor. Here are some of the benefits of itemizing.
You can claim more expenses. If you meet the qualifications, itemization offers the opportunity to deduct more expenses. Paying a mortgage, college tuition or making large charitable donations are all expenses allowed under itemization that might not be covered by the standard deduction. Some other expenses you can claim when itemizing deductions include medical costs, taxes already paid, theft losses, employment expenses, some investment losses and even gambling losses.
There are significant financial incentives. Because you can include more deductions when itemizing, you might stand to earn a larger tax refund on expenses not included in the standard deduction. If you're in the 15 percent tax bracket, for example, you can get $150 discounted from your tax bill for every $1,000 in itemized deductions, according to H&R Block.
Additionally, itemizing offers options in terms of how you can file for the best financial advantages. For example, you can itemize certain expenses on your state tax return and earn more back than if you claimed the standard deduction on your federal return, according to H&R Block.
Disadvantages of Itemized Deductions
If you don't have the financial records to back up the itemized deductions you want to claim, then you should stick to the standard deduction. Here are a couple of reasons to avoid itemizing.
It takes more paperwork and effort to itemize. Unlike standard deductions, itemizing is a manual process. You have to be able to document every itemized deduction. Depending on how good your records are and the amount of your deductions, this time-consuming process might not reduce your taxable income enough to make it worth the effort. You'll also need to be a bit more tax-savvy to properly fill out Form 1040 and Schedule A.
There are certain limitations. Some itemized deductions might be less than you'd hoped if your adjusted gross income listed on Form 1040 is relatively higher. According to H&R Block, for 2015 tax returns, some limits apply if your adjusted gross income was $309,900 for married couples filing jointly or qualifying widows and widowers, $284,050 for heads of households, $258,250 for single taxpayers or $154,950 for married couples filing separately.
When to Call In a Professional Tax Advisor
If you keep good records and document your expenses throughout the year, then come tax time you'll have a better idea of whether standard or itemized deductions will give you the biggest tax break. Whether you're filing with the help of a professional or on your own, solid records are essential.
Tax software and preparation services like TurboTax, TaxAct and H&R Block can help simplify the process, but if your financial situation is unique, complex or if you just had an unusual year -- such as you won the lottery, bought property or changed your marital status -- then contracting the services of a tax advisor or financial professional is a smart way to ensure you file all necessary forms correctly. A professional also can ask you the right questions to ensure you don't miss any possible deductions so that you can further reduce your taxable income.
Paul Sisolak writes for GoBankingRates.com, a source for the interest rates on savings accounts, CDs, mortgages, auto loans and more.
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