The standard deduction is a specific dollar amount that reduces the amount of income on which you are taxable. The standard deduction reduces a taxpayer's taxable income. It ensures that only households with incomes above certain thresholds will owe income taxes. The standard deduction is a specific figure that taxpayers can use to reduce their taxable income when they file their annual tax returns.
Keep in mind that taxable income is your adjusted gross income (AGI) minus any itemized deduction or your standard deduction. The standard deduction lowers your taxable income to help lower your federal tax bill. The IRS updates the standard deduction amount each tax year to take into account inflation. The amount you can deduct depends on your marital status, your age, and if you're blind.
If the standard deduction lowers your AGI enough, a portion of your taxable income could fall to a lower tax bracket, saving you more on taxes. Federal tax law allows you to deduct several different personal expenses from your taxable income each year. Because most of the TCJA's individual income tax provisions expire after 2025, the taxable income thresholds will return to what they would have been under the previous law, unless Congress extends or makes the current law permanent. Most chose it because it was greater than the itemized deductions they could request, but some did so because it was easier than identifying and adding up the expenses they could itemize or because they didn't know that itemizing would reduce their tax liability.
The maximum amount of the earned income tax credit (EITC) for taxpayers whose self-reported income was in the lowest income category and the taxable income levels for their thresholds and ceilings are also adjusted for inflation. If you think it's best to itemize deductions, you'll probably benefit from working with a financial advisor who specializes in taxes. If you live in a state that requires you to pay income taxes, there may be a standard state deduction that you can apply for on your state tax return. This allows you to deduct the actual amount of certain expenses from your taxable income (up to IRS limits).
The alternative minimum tax (AMT) applies to alternative minimum taxable income, such as regular taxable income with certain added tax benefits, that exceed the exemption level. If your standard deduction is greater than your itemized deductions and saves you more money on taxes, it makes sense to apply for the standard deduction. Most Americans choose that path, and you can apply for the standard deduction even if there isn't a single expense you can deduct otherwise. Personal income tax returns require the calculation of adjusted gross income (AGI) before reaching the final amount of taxable income.
For example, the student loan interest deduction allows you to deduct interest paid on qualified student loans, provided that you meet the specific requirements of the deduction. Together, the standard deduction and personal exemptions created taxable income thresholds, ensuring that taxpayers with income below those thresholds did not pay any income tax. Tax deductions lower your tax burden by reducing your taxable income, and you can apply for the standard deduction or itemize your deductions when you file your return.
