Stead & Associates

Should you take a standard or itemized tax deduction?

The difference between tax credits and tax deductions can be confusing. Both options are limited by your income so deciding between the two can determine how large your tax return is. Consulting a tax professional can help you determine the best choice for you and which of them you are eligible for.

Tax credits reduce the amount of tax weighed against your income, helping you reduce your overall tax liability, and increase your tax refund. Meanwhile, a tax deduction reduces how much of your income is actually subject to taxes. Federal tax deductions correspond to your tax bracket and are calculated before you calculate the amount of taxes you owe on your returns.

Tax credits can be either refundable or non-refundable. Non-refundable tax credits do not allow you to obtain the full value of your credit if the reduction drops your tax bill below zero [1]. This means you will only receive the amount of credit due before your tax bill is completely reduced. Refundable tax credits allows the value of the credit to extend beyond the extent of your tax bill and can result in a refund check. Therefore, allowing you to obtain the full value of the credit, regardless of whether or not it reduces your tax bill below zero. The IRS has specific criteria that must be met to qualify for either refundable or nonrefundable these tax credits.

There are several kinds of tax credits a person can be eligible for. These include:

  • family and dependent credits
  • income and savings credits
  • homeowner credits
  • electric vehicle credits
  • health care credits

Tax deductions can also be further divided into standard and itemized deductions. Taxpayers can use whichever method gives them the lower tax amount. Standard deductions vary depending on age, income, disability, and filing status. Most people can find their standard deductions on the Form 1040. However, there are some people who are ineligible to use a standard tax deduction. These people include:

  • a married individual filing as married separately whose spouse itemized deductions
  • an individual who files a tax return for a period of less than 12 months
  • an individual who was a non-resident alien or a dual-status alien during the year
  • an estate, trust, common trust fund, or partnership

Those who do not qualify for standard deductions will need to itemize their deductions. Itemized deductions include amounts you paid for state and local income or sales tax, real estate and property taxes, and disaster losses. There are those who may be eligible for standard deductions but may benefit more by itemizing their deductions. Some of the most common itemized deductions include:

  • large unreimbursed medical expenses
  • casualties from theft or loss during a natural disaster
  • mortgage interest
  • real property taxes
  • large charitable donations

Available tax deductions for individuals include work related deductions, itemized deductions, education deductions, health care deductions, and investment related deductions. These can range anywhere from business expenses to the sale of a home.

The standard tax deduction for married couples who filed jointly and qualifying widow(er)s is around $26k [2]. Heads of households received a standard deduction of $19,400.00 while single or married couples filing separately received a standard deduction of $12,950.00 [3].

Making sure you qualify for both credits and deductions requires meeting certain IRS criteria [4]. Some credits and deductions relate to parents of an adopted child, students at undergraduate or graduate universities, and those who have solar energy systems in their home [5].