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The Berman Buzz

Tax Tip Tuesday: Understanding Standard Deductions and Itemized Deductions

Generally, more deductions equal lower taxes overall. Therefore, one of the first decisions you must make when completing a tax return is whether to take the standard deduction or the itemized deductions. While it is easier to take the standard deduction, especially if you have not been tracking your expenses for the year, the extra effort to itemize deductions could be worth it to lower your tax bill or boost your refund.

As you file your tax return, several contributing factors will influence your choice to take standard or itemized deductions. So, it is a good idea to run the numbers!

Standard Deduction Amount

Every year, the standard deduction amount increases slightly to keep up with inflation. The size of your standard deduction depends on your filing status, income, age, and other factors. Taxpayers aged 65 or older that do not itemize are entitled to a higher standard deduction.

In the tax year 2020, 87.3% of Americans took the standard deduction. It is unknown if those taxpayers could have fared better by itemizing deductions. For the 2022 tax year, the standard deduction is $12,950 for single filers, $25,900 for joint filers, and $19,400 for heads of household.

Overlooked Deductions

Are there benefits you can take advantage of even if you take the standard deduction? Yes. Some overlooked deductions include:

  • Earned Income Tax Credit: About 20 percent of Americans qualify but miss taking this credit, which on average returned $2,043 per claimant. You might be eligible if you earned $53,057 ($59,187 married and filing jointly).

  • Child Tax Credit: If you have a dependent under 17 years old and earn less than $200,000 ($400,000 married and filing jointly), you may qualify for a $2,000 credit per child. The credit begins to phase out above those income limits.

No Choice but to Itemize Deductions

Not everyone can use the standard deduction because of certain tax activities or filing statuses. If you fall into any of the following categories, you will likely have no choice but to itemize your deductions. And remember, if you incorrectly file these deductions, it can trigger an audit.

  • Shortened Tax Return: You file a tax return for fewer than 12 months because you are changing your yearly accounting period.

  • Non-Residents: You have been a non-resident at any point during the tax year.

  • Filing Status: You are married, filing separately, and your spouse is itemizing deductions.

Itemized Deductions Add Up

Many costs and contributions are deductible, and you should itemize deductions when your total is higher than the standard deduction. Hints as to whether you may benefit from itemizing deductions could lie in whether you owned a home, experienced significant medical expenses, or made sizable charitable donations. To claim these deductions, you will need evidence indicating that you are eligible to have a portion of your income exempt from taxation.

  • State and Local Sales Tax: You can deduct state and local income taxes up to $10,000 ($5,000 married and filing separately). You can either add up sales tax from your receipts for the year or use the IRS calculator to figure out what you can deduct.

  • Home and Mortgage: If you own a home and your mortgage interest, points, and mortgage insurance premiums exceed your standard deduction, there is a good chance you would benefit from itemizing.

  • Medical Expenses: Unreimbursed, qualified medical expenses that exceed 7.5 percent of your adjusted gross income can be deductible if you itemize. Qualified medical expenses include ambulances, contact lenses, chiropractors, crutches, eye exams, glasses, prescription drugs, hearing aids, home care, fertility treatments, lab fees, and long-term care.

  • Charitable Donations: You can only deduct charitable contributions if itemized. If you made many donations throughout the year, it could add up to thousands of dollars, making itemizing more beneficial.

Here to Help

If you have questions about your unique situation or need strategic financial advice, we are here to help. We build value added relationships with each client to understand their business structure to provide solid solutions, and our approach offers clients direct access to the firm's decision-makers. Contact us to let us know how we can best support you.


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