Choosing Between Standard Deduction and Itemizing Deductions

When it comes to taking deductions on one’s federal income tax return, the IRS allows individuals two options:

(1) Uses a simple “standard deduction”; or

(2) Perform more work in order to claim “itemized deductions”. The goal in choosing the right option is to lower one’s taxable income and pay the least amount of federal income taxes. This column discusses the factors individuals should consider when choosing between the standard deduction and itemizing their deductions as they prepare their 2022 federal income tax returns.

What is the Standard Deduction?

A standard deduction is a lump sum dollar amount that an individual can subtract from their gross income to determine their taxable income. With the standard deduction, an individual does not get to choose the amount deducted. The amount deducted depends on the individual’s filing status (single, married filing jointly, married filing separately, head of household), age (over age 65 or younger), and whether the individual is blind.

What is an Itemized Deduction?

An itemized deduction is an IRS qualified expense that an individual can subtract from gross income to determine their taxable income. The number of IRS qualified expenses that individuals are permitted to itemize and their dollar amounts will vary each year.

That means choosing the itemized deduction involves extra planning and adding and subtracting on an individual’s part. However, the extra work involved may be worth the time in the form of a reduced federal income tax liability.

When Should the Standard Deduction be Taken?

Since the passage of the Tax Cut and Jobs Act of 2017 (TCJA), the vast majority of individuals (87 percent) have chosen the standard deduction over itemized deductions. The reason behind this vast increase of using the standard deduction is that TCJA doubled the standard deduction over what it was prior to TCJA’s passage.

The following table shows the standard deduction during 2021, 2022 and 2023:

A few items to note:

• Individuals who are blind and/or over the age of 65 get a higher standard deduction. For 2022, the standard deduction increases by $1,750 for single or head of household tax filers, or $1,400 for married filing jointly tax filers. The deduction doubles for those Individuals who are both over age 65 and blind.

• Individuals cannot use the standard deduction if they file married filing separately and their spouse itemizes his or her deductions. That means that spouses who file as married filing separately have to “be on the same page” as to which deduction method will work best for them.

When Should an Individual Itemize?

If an individual’s total amount of itemized deductions exceeds his or her standard deduction, then it makes sense to itemize one’s deductions on his or her federal income tax return. “Makes sense” means a lower federal income tax liability.

Suppose a married individual’s itemized deductions add up to $1,000 more than the standard deduction. If the individual files as married filing jointly during 2022, with the standard deduction of $25,900, and his itemized deductions total $26,900, then if the individual’s federal marginal tax bracket is 22 percent, the individual’s tax savings by itemizing will be 22 percent of $1,000, or $220.

Qualifying Itemized Deductions

The following is a list of expenses that qualify as itemized deductions and listed on IRS Form 1040 Schedule A.

• Mortgage interest. The IRS allows individuals to deduct mortgage interest on the first $750,000 ($375,000 if married filing separately) of the individual’s mortgage if the individual took out the mortgage after December 16, 2017. If an individual took out the mortgage before December 16, 2017, the mortgage limit is $1 million ($500,000 if married filing separately).

• Charitable donations. Donations of cash or property to nonprofits, church, synagogues, mosques, or disaster relief funds can be itemized, up to 60 percent of their gross income.

• Medical expenses. Any out-of-pocket medical, dental and vision expense that exceed 7.5 percent of one’s adjusted gross income (AGI) can be included as medical expenses on Schedule A.

• State and local taxes. The State and Local Tax Deduction (SALT) allows an individual to deduct up to $10,000 ($5,000 if married filing separately) of the individual’s combined state and local property taxes and state income or sales taxes.

In summary, individuals should itemize or take the standard deduction depending on their tax filing status for 2022 and the amount of their itemized deductions, and their standard deductions, as explained here:

• Single or married filing separately. Only itemize one’s deductions if the itemized deductions total more than the standard deduction of $12,950.

• Married filing jointly. Only itemize one’s deductions if the itemized deductions total more than the standard deduction of $25,900.

•Head of household. Only itemize one’s deductions if the itemized deductions total more than the standard deduction of $19,400.

Another consideration is state income taxes. Many states that have state and local income taxes require residents to file their state income tax return in the same way as they file their federal income tax return. If a state resident uses the standard deduction on the federal income tax return, then the state resident must use the state standard deduction on the state income tax return.

The result could be a larger state income tax liability for the year. Those individuals are therefore encouraged to determine which combination (standard deduction or itemizing) result in the lower combined federal – state tax liability for the year.