What Is Standard Deduction?

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The standard deduction amount one qualifies for depends on their tax filing, age, and whether they are blind or claimed as a dependent on another person’s tax return. USA’s federal tax agency sets this amount annually to keep up with inflation. It allows one to claim this deduction even if they have no expenses qualifying for itemized deductions.

Key Takeaways

How Does Standard Deduction Work?

Standard deduction refers to a particular dollar amount that reduces a person’s taxable income. It ensures a particular portion of a taxpayer’s income that is not subject to income tax. Typically, the IRS increases this amount annually owing to inflation. Taxpayers can itemize their deductions or claim the standard deduction. In other words, one cannot claim both in the same year.

Thus, if individuals take the IRS standard deduction, they cannot claim home mortgage interest or other widespread expenses like charitable donations or medical expenses as a tax deduction. One must note that if taxpayers itemize their deductions, they must keep records supporting the deductions in case the federal tax agency decides to audit them.

People aged 65 and above can claim an additional standard deduction. Moreover, legally blind individuals can claim extra deduction provided they are blind on the last day of the tax year. That said, a person claimed as a dependent on another individual’s return gets a deduction.

Usually, the deduction is available to any person who does not itemize. However, there are exceptions. For example, one cannot claim this deduction in the following cases:

  • A Person files taxes as a partnership, trust, estate, or common trust fund.During the tax year, an individual was a dual-status alien or a nonresident alien.A person files a return for less than twelve months owing to a change in their accounting period.An individual is married and files a return separately from a spouse who itemizes deductions.

History

In 1944, The U.S. Congress introduced the standard deduction. It allowed taxpayers to deduct 10% from their taxable income to reduce their tax liability instead of keeping a box filled with receipts. However, over the years, the government has been increasing the standard deduction amount to mitigate the impact of inflation.

This table can help one understand how the limit has been rising over the past few years for each filing status owing to inflation.

Examples

Let us look at a few standard deduction examples to understand the concept better.

Example #1

Suppose John is single and earns an annual gross income of $50,000 in the tax year 2022 with itemized deductions worth $8,000. However, if he claims a standard deduction, he can reduce his tax liability by $12,950, which is more than the itemized deductions. Thus, his taxable income for the year will be $37,050.

Example #2

According to the data published by the U.S. Bureau of Labor Statistics, electricity prices, rent, and the cost of groceries have surged by 15.5%, 7.2%, and 13%, respectively. Such increases in the prices of groceries have not been witnessed in the last 40 years. Hence, the U.S. government decided to raise the standard deduction amount.

For single individuals or persons filing taxes separately from their spouses, the amount has surged by $900 to $13,850. Moreover, the amounts for married couples filing jointly and individuals filing as heads of households are $27,700 and $20,800, respectively.

Difference Between Standard Deduction And Itemized Deduction

The critical differences between standard and itemized deductions are as follows:

  • The standard deduction is a specific amount determined by a taxpayer’s age and tax filing status. On the other hand, itemized deductions allow individuals to deduct qualifying expenses, for example, mortgage interest, from their taxable income to reduce their tax liability.It is easier for taxpayers to claim the IRS standard deduction than itemized deductions as they do not need to keep records supporting the deductions.There is no limitation on itemized deductions, unlike the standard deduction.

Standard Deduction vs Personal Exemption vs Mortgage Interest Deduction

The concepts of the personal exemption, standard deduction, and mortgage interest deduction often confuse new taxpayers. That said, they must understand how these tax benefits differ from each other to file their returns accurately. So, the table below highlights the distinct characteristics between them.

This article has been a guide to what is Standard Deduction. Here, we explain its history, examples, and differences with itemized deductions and personal exemptions. You can learn more about it from the following articles –

If individuals reside in a state in the U.S. that requires them to pay income taxes, a state-based standard deduction might be available to claim on the state tax return. Again, one can utilize an IRS tool to compute the deduction amount.

If an individual’s standard deduction is lower than the itemized deductions, they might want to consider itemizing to save money. They can opt for the standard one if the itemized deductions are lower.

No, a taxpayer’s annual gross income or AGI does not include this deduction. AGI represents the overall taxable income before considering any tax benefit, including itemized deductions and exemptions.

If the deduction amount reduces taxpayers’ annual gross income sufficiently, a taxpayer can fall into a lower tax bracket. As a result, their tax liability will decrease.

  • Tax BreakTake-Home PayIndividual Tax Return