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The Standard Deduction

Tax deductions are wonderful, aren’t they? While they’re not as good as a nice tax credit [3], tax deductions can reduce your tax liability significantly depending on your income tax bracket [4].

In the United States, you have two options when it comes to claiming deductions. You can go the easy route of claiming the standard deduction, which is a set amount each year that requires no documentation, or you can itemize your deductions, which allows you to select which deductions you want to claim and requires you to back it up with documentation.

Standard Deduction (2006-2012)

When you claim the standard deduction, you can’t also claim itemized deductions. For example, if you claim the standard deduction, you won’t be able to claim any mortgage interest as a deduction. You won’t be able to claim charitable contributions. It’s an either or choice – standard or itemized.

Here are the base standard deduction amounts for tax years 2006 through 2011:

Year Single Married
2006 $5,150 $10,300 $5,150 $7,550
2007 $5,350 $10,700 $5,350 $7,850
2008 $5,450 $10,900 $5,450 $8,000
2009 $5,700 $11,400 $5,700 $8,350
2010 $5,700 $11,400 $5,700 $8,400
2011 $5,800 $11,600 $5,800 $8,500
2012 $5,950 $11,900 $5,950 $8,700

Deduction Adjustments

Age, Vision Adjustment: If you are 65 years or older, your spouse is 65 years or older, legally blind and/or your spouse is legally blind, you can have an adjustment of $1,400 for single and HOH filers, $1,100 for married filing jointly (per person) per condition.

If you are married, both are over 65, then you increase your standard deduction by $2,200 ($1,100 x 2). If you are married, both are over 65 and both are blind, then you increase your standard deduction by $4,400 ($1,100 x 2 x 2).

Real Estate Taxes: If you paid state or local real estate taxes that you could otherwise claim as an itemized deduction, you can get up to $500 (single filers) or $1,000 (married filed jointly) increase to your standard deduction.

Itemize or Standard?

For 2012, a single filer can claim a $5,980 standard deduction on their income tax return. If that filer’s itemized deductions exceed $5,980, it’s better to claim itemized deductions. If they do not exceed $5,980, then it’s better to claim the standard deduction (also because it requires less paperwork).

Above-The-Line Deductions

Above-the-line deductions, officially called “adjustments to income,” are tax deductions that apply even if you claim the standard deduction. Whereas the mortgage interest rate deduction is only available if you itemize your deductions, contributions to an IRA or 401(k) are “adjustments to income.” These adjustments to income reduce your adjusted gross income (AGI) and, consequently, your taxes. Student loan interest, moving expenses, alimony and many others are considered above-the-line deductions [5] (the list is pretty long and governed by Internal Revenue Code Section 62(a)(1)).

That’s the standard deduction in a nutshell. I hope that explanation comes in handy as you prepare your taxes this year!