Pros and Cons of Standard or Itemized Deductions On Filing Taxes
With tax season around the corner, its time to make some important decisions. For instance, if you have numerous itemized deductions such as mortgage interest, charitable contributions, etc., it may make sense for you to itemize your deductions instead of using the standard deduction for your tax filing status. Use our calculator below to help you determine whether to itemize or take the standard deduction.
If you are expecting either a large refund or a significant tax bill, use another calculator to determine if you should adjust your payroll withholdings.
Deductions can help you lower your tax obligations by lowering the amount of money you are taxed on. You can deduct items such as charitable donations, mortgage interest, retirement savings contributions and other items from your before-tax income. This way, you are taxed on the smaller number. If you earn $50,000 a year but qualify for $5,000 in deductions, for example, you will pay income taxes on $45,000 instead. In some cases, deductions can push you into a lower income tax bracket, too, so you pay a smaller tax rate.
When claiming deductions, you can itemize your deductions, or you can claim a standard deduction. The standard deduction is a flat fee you can claim. The fee is based on whether you are married, single, the head of a household, a senior age 65 or older or legally blind. In 2017, for example, a head of household could claim a standard deduction of $9,350.
Itemized deductions ask you to list and claim specific deductions when you file your income taxes. These deductions can also reduce your tax bill. For every specific amount you claim for mortgage interests or other deductibles, some money will be deducted from your taxes.
The Pros and Cons
Standard tax deductions have a few advantages:
- You don’t have to keep receipts or determine what expenses of yours may be deductible
- You qualify even if you don’t have any expenses that qualify for itemized deductions
- You don’t have to list and claim lots of separate deductions or worry about what is a deductible and what is not
- You won’t have to account to the IRS why you claimed a specific itemized deductible if you are ever audited.
However, the standard deduction also has some disadvantages. The most significant one is that there is a dollar limit. Even if you would qualify for more deductions if you itemized them, standard deductions only allow you to reduce your tax bill by a specific amount.
Itemized deductions have a few advantages, too:
- They can save you more on your tax bill, especially if you have large flood or theft losses, have large medical expenses or have large unreimbursed expenses for your work.
- You get to choose which deductions to claim
These deductions have some drawbacks:
- The IRS may challenge your itemized deductions.
- You need to file and claim deductions, which means you need to keep track of them.
- You need to keep proof of your deductions in case you are ever audited.
- If your AGI (adjusted gross income) is above a specific limit, some of your itemized deductions may be limited.
Use the itemized tax deduction calculator at Money Help Center to determine whether your itemized deductions would save you more than the standard deduction, so you can file with confidence. Also, look at how your tax liability will change in 2018.