Which will net you a smaller tax bill? That's the question that matters. Image source: Stockmonkeys.com.
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When it comes to filing income taxes, nobody wants to pay a penny more than they have to. And since you can deduct a lot of personal expenses from your federal income, including charitable and work-related expenses, and even state and local taxes, a lot of people will pay lower taxes by itemizing versus just taking the standard federal deduction.
Which should you do? Let's take a closer look at both options, what they mean, and how you can figure out which is right for you.
Standard deduction explainedIn short, the IRS offers a basic standard deduction that all tax filers can subtract from their gross incomes, reducing how much of their income is subject to income tax. Here's a look at the standard deductions:
- Single or married filing separately: $6,300
- Married filing jointly or qualifying widow(er) with dependent child: $12,600
- Head of household: $9.250
Depending on certain situations, such as age (those born before January 2, 1951), and blindness, you may qualify for a higher standard deduction. But for the most part, the majority of filers who choose the standard deduction would qualify for one of the three amounts above.
Itemized deductions explainedIn short, itemized deductions are expenses that qualify as deductible from your gross income, and include the following:
- Real estate and property tax
- Home mortgage interest
- State and local income tax
- Charitable contributions (both cash and donated goods)
- Unreimbursed medical expenses
There are more items that qualify as itemized deductions, but these are the largest, most-common ones that people can claim.
Itemize or not -- how do I decide?The best and simplest way to make the decision is to do the math. If your itemized deductions are a larger number than the standard deduction you qualify for, then itemizing is the way to go. After all, a larger itemized deduction means you'll pay less tax. And that means either a larger refund, or a smaller check to the IRS if you owe additional income tax.
Technology has made it even easier to figure out which way to go. With dozens of reputable tax-software providers out there today (many of which are free to file for millions of people), it's just a simple matter of plugging your information into a tax-prep program, and letting the software figure out whether itemizing or the standard deduction will net you a smaller tax bill.
Aren't you more likely to get audited if you itemize?While there's some evidence to suggest that itemizers get audited more often, that's more a product of the IRS typically auditing those with higher incomes at a higher rate than those earning in the middle or lower levels. Higher earners often have a bevy of expenses that qualify as deductions.
But while audits for top earners have increased in recent years, the rest of us are getting audited less often today than in years before:
EXAMINATION COVERAGE IS PERCENT OF FILINGS AUDITED. SOURCE: IRS.
The reality is, your chances of getting audited are probably lower now than they were even a decade ago. With the IRS continuing to face record budget shortfalls, this isn't likely to change overnight.
Besides, if you're itemizing legitimate expenses, you shouldn't be concerned. An audit isn't fun, but if you're claiming legitimate expenses, even a slightly higher chance of being audited shouldn't dissuade you from itemizing, especially if it will lower your tax bill.
The article Should I Claim the Standard Deduction or Itemize? originally appeared on Fool.com.
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