When filing your taxes, how do you choose which deduction to take? The standard deduction or itemized deductions? What is the standard deduction? And what does it mean to itemize deductions? And why should you use one instead of the other? TurboTax software solves these questions for you by choosing the option that gives you the biggest tax refund. Ultimately, both deductions will save you money, but one will save you more than the other depending on your circumstances.
What Is a Standard Deduction?
The standard deduction is a fixed dollar amount that can be subtracted from your Adjustable Gross Income (AGI) to reduce the amount of taxes you owe. The specific amount is set every year by the IRS and is usually adjusted for inflation. Which of the standard deductions you can take is determined by your filing status, such as Single or Married Filing Jointly. Taking the standard deduction precludes you from itemizing any of your deductions.
What Is an Itemized Deduction?
Itemized deductions are expenses that fall under a long list of IRS allowable categories. Some of these categories are dental and medical expenses, home mortgage interest, charitable contributions, business use of a home or car and deductible taxes. You must have paid these expenses for yourself or for one of your dependents, such as your spouse or child. Additionally, you must be able to document these expenses with receipts. You don’t need to know what these deductions are. TurboTax will easily guide you through itemized deductions.
How Do I Choose?
Itemizing will usually be the way to go if you had large non-reimbursed dental and medical expenses or if you had interest expense on a mortgage, paid property taxes, had large employee business expenses that were not reimbursed by your employer, had major uninsured casualty losses or made large contributions to charities, but TurboTax will make the appropriate choice for you based on your entries for these expenses.
When You Don’t Have a Choice
There are times the choice will be made for you. You cannot use the standard deduction if you are a non-resident alien. If you are married filing separately, and your spouse chooses the standard deduction, you cannot itemize. If you do not have the necessary records for itemizing, then you have use the standard deduction. If you qualify to file Form 1040EZ or 1040A, you cannot itemize, though you may be able to claim certain exemptions and credits.
Both types of deductions are very important because they are a way to reduce your taxable income. While it is may take some time to gather receipts for itemized deductions, you might find it a worthwhile effort as you try to make your taxable income as low as you legally can.