The Standard Deduction – What Is It and Why Do I Need to Know About It

Arin V., EA , MBA

Arin is an Enrolled Agent (EA), authorized to represent taxpayers in front of the IRS, and holds a BA and MBA (Management) degree from California State University, Northridge.

No matter what their socioeconomic situation, nearly everyone feels that they are paying too much income tax. But how would you like to have a certain portion of your earnings not subject to income tax? Of course, everyone would like for this to be the case. The good news is that it is the case, with the standard deduction.

What is the standard deduction? It is a specific dollar amount that reduces the amount of income on which you are taxed. Simply put, it is the portion of your income that is not subject to income tax. This results in a reduced taxable income and hence a reduced tax liability. 

The amount of your standard deduction is dependent upon a few factors; mainly, on your filing status, age, and certain other criteria. 

For the 2020 tax year, the standard deduction for people filing single or married filing separately is $12,400, while it is $24,800 for those who are married filing jointly. If you are filing as head of household, the standard deduction would be $18,650 for tax year 2020. For tax year 2021, these amounts are raised to $12,550 for single/married filing separately, $25,100 for married filing jointly, and $18,800 for head of household. 

However, this has not always been the case. In previous years, the standard deduction was a lot lower. After the Tax Cuts and Jobs Act of 2018, the standard deduction was raised for taxpayers, and as a result, many people no longer have to itemize their deductions, which has simplified their tax returns a bit. Why? Because in this scenario, you would not have to keep track of every single qualifying deduction during the year. And in any case, many people find that the standard deduction is higher than the figure would have been had they tried to keep meticulous records of every deduction and itemize deductions. 

But what is the difference between the standard deduction and itemized deductions? Stated briefly, the standard deduction is an amount that you automatically get to exclude from taxes, with no need to furnish evidence to the IRS. On the other hand, if you itemize deductions, you could potentially have a higher amount of earnings to exclude from taxes, but, you would need to keep records of the deductions.

Therefore, it is important to note that in certain cases, it would be better to not take the standard deduction, and instead, itemize your deductions on Schedule A of your federal tax return. This would be the case in scenarios in which you had a large amount of medical expenses, mortgage interest on your main home, charitable contributions, and other deductions, which raised the total amount of deductions above the standard deduction. In this scenario, you would simply claim the itemized deductions instead of the standard deduction, to achieve even greater tax savings.

We should note that if you itemize your deductions, you cannot take the standard deduction, and vice versa. Therefore, you will have to see which option is more advantageous and select that one. Also, many non-residents (for tax purposes) in the U.S. are unable to take the standard deduction. However, if you are a non-resident in the U.S. but your spouse is a U.S. citizen or resident, you can elect to be treated as a U.S. person for tax purposes, and file jointly with your spouse and take the standard deduction. In this scenario, even though you are a non-resident, you would have to declare worldwide income and assets on your U.S. tax return. Therefore, it makes sense to carefully analyze your situation to see which path would be more fruitful. In such scenarios, it makes sense to engage the help of experts who are well-versed in international tax issues that expats face.