Standard vs. Itemized Deductions

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Form 1040Whenever tax season rolls around, I often see some of the same questions hit my inbox like what’s my tax bracket?, when are taxes tax due this year?, and others like it. It’s not surprising considering how complicated the tax code is (like the English language, exceptions are the rule) and one of the common questions I see is about deductions.

In general, a tax deduction is an amount you can deduct from your income to arrive at your adjusted gross income, which is used to calculate your tax liability. Anyone can claim the standard deduction, which is a flat amount based on your filing status, and that requires no support documentation. Alternatively, you can opt to itemize your deductions which means you forgo the flat standard deduction and instead will itemize, or list out, all your deductions (and along with it, supporting documentation).

Certain expenses are allowable if you itemize deductions, such as charitable contributions, but not if you claim the standard deduction. If you claim the standard deduction and make a donation to your favorite charity, you don’t get the tax deduction for that contribution. Most tax preparation software will help you calculate your deduction if you were to itemize, compare it with what you are eligible for as a standard deduction, and choose the best one for you.

2011 Standard Deduction

For Tax Year 2011, the standard deduction for each of the filing statuses is:

Filing Status Standard Deduction
Single $5,800
Head of Household $8,500
Married Filing Jointly $11,600
Qualifying widow or Widower $11,600
Married Filing Separately $5,800

The standard deduction can be higher based on certain characteristics but for most these figures are accurate.

Itemized Deductions

The most common itemized deductions are charitable contributions, mortgage and home equity loan interest, property taxes, and state income taxes (state sales taxes for those who have no state income taxes, as you have a choice). While the list of itemized deductions is exceptionally long, you are often spared knowing it because tax preparation software will take care of it for you. In order to claim itemized deductions, you’ll have to file a Form 1040 (you can’t use the 1040EZ) and attached a Schedule A (again, use software and this is handled for you… software rules!).

Tax Planning

One key difference between the standard deduction and itemizing deductions is that with the itemized deductions, you will have expended that money. In other words, you paid mortgage interest and are claiming it as a deduction after the fact. With the standard deduction, you didn’t. This is best explained in an example involving a home.

Let’s say you own a home on which you pay $11,600 a year in mortgage interest, which happens to be the amount of the standard deduction for a married filing jointly couple. You and your spouse come into a windfall and are considering paying off your mortgage but you’re curious what the tax benefit would be. If you paid $11,600 this year in mortgage interest, you could claim it on your taxes and, assuming you were in the 25% tax bracket, get $2900 off your taxes because of the deduction. If you were to pay off the loan and claim the standard deduction, you’d still get $2900 off your taxes because of the deduction (25% of the standard deduction of $11,600) but you’d also retain $11,600 in your pocket because you never paid interest in the first place. You’re ahead by $14,500. This is an unrealistic example, as you’d probably have state income taxes and you’d definitely have property taxes, but I think you get the picture. This is the reason why I think the mortgage interest deduction isn’t as awesome as everyone makes it out to be.

That about covers the main ideas behind the standard and itemized deductions, I hope that answers some of the questions out there!

(Photo: teegardin)

{ 2 comments, please add your thoughts now! }

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2 Responses to “Standard vs. Itemized Deductions”

  1. TomTaxman says:

    The second to last paragraph, the one with the mortgage interest example, makes no sense at all. It is so invalid, I can’t believe it was allowed to be post/published whatever. My respect for the author and this website just dropped to nil.

  2. Jesse R says:

    Yeah, your example with numbers is riddled with errors. First and most obvious, you claim the total savings by not paying any interest and using standard deductions is the 11,600 you didn’t pay in interest, plus the $2,900 refund. But you get the $2,900 if you itemize as well so that’s shouldn’t be added to the $11,600 you “saved” by not paying interest.

    What your problem really boils down to (since you choose to assume mortgage interest equal to the standard deduction) is that in one case you paid the interest to someone ($11,600) and in the other you didn’t have to pay interest, and you simply took the standard deduction. So all you can say from your example is – if you don’t have to pay mortgage interest, then don’t… pretty much a no brainer there but not an option for most people.

    It’s probably helpful in future articles to assume the same situation (ie, you have a mortgage and pay interest in both cases). If you assumed that, you example would show that the bottom line is the same whether you itemize or not. Of course, if you itemize in the above example you could also deduct property taxes and state income taxes which now means it makes sense to itemize.

    So your $14,500 difference is misleading and wrong because you assumed the standard deduction filer didn’t have to make any interest payments (so totally different scenario) and you incorrectly counted the $2,900 refund for the standard filer but not the itemizer. Please cease and desist from giving tax advise until you fully get it. No offense meant but misinformation is worse than no information at all.

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