Standard Deduction

The standard deduction is an amount specified by the government that taxpayers can deduct from their taxable income to reduce their tax liability. The Internal Revenue Service or IRS allows persons to take it if they do not itemize their deductions utilizing Schedule A of Form 1040.

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.

• Standard deduction refers to a specific dollar amount by which a taxpayer can reduce their taxable income, thus, lowering their tax liability for a year. The IRS changes this amount annually due to inflation.
• All taxpayers cannot claim this deduction; whether or not one can claim it depends on their tax filing status and age. Individuals aged 65 or above and blind persons are eligible for extra deduction.
• Individuals cannot get this deduction if they itemize their deductions.
• By choosing this deduction, taxpayers can avoid the hassle of keeping track of every qualifying expense.

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 in case of standard deduction in income tax, 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 standard deduction in income tax 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.

In 1944, The U.S. Congress introduced the standard deduction. Tax standard deduction 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.

Let us look at a few standard deduction examples to understand the concept of tax standard deduction 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 to claim the new tax regime standard deduction, 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.

Let us learn the actual purpose of the concept to calculate standard deduction or why it is important for individuals to avail the same.

The primary purpose of the concept is to help reduce individuals' tax liability. They can reduce the amount of tax they are supposed to pay to the government, and this leads to more savings and better usage of investment opportunities. It is specifically helpful for those who have already been subject to a deduction of tax from their salary, which is the TDS. Since their salary is already reduced, they can save some tax using the standard deduction process.

Since there is no paperwork or time-consuming step to be followed to calculate standard deduction and claim the same, this proves to be a huge benefit for individuals. Thus, they prefer to go for it. Unlike any other benefit particularly related to travel, medical, etc, where bills, invoices or relevant documents need to be submitted to claim the expense amount. This used to involve a huge amount of paperwork that is not required in this concept. Thus, one of the purposes is to easily claim the deductions.

Not only absence of paperwork, it is also a useful alternative to itemised deduction, as detailed in this article below. It is a flat single amount that reduces the tax to a huge amount.

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 new tax regime standard deduction.
• Another important difference between them is that the former results in a higher amount. Many people find the former giving a greater resultant amount due to which they get a greater deduction as compared to the latter because the eligible expenses are separate.
• The former is a complete total deduction amount whereas the latter allows to create an itemised list of all the tax-deductible expenses for a given financial year.

Thus, the above are some important differences between the two concepts which any taxpayer should understand so as to take maximum benefit from both of them.

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. We explain differences with itemized deduction, mortgage interest deduction, example, history & purpose. You can learn more about it from the following articles –

• Tax Break
• Take-Home Pay
• Individual Tax Return