The standard deduction is a set dollar amount that reduces the amount of income on which you are taxable. It is designed to ensure that only households with incomes above certain thresholds will owe income taxes. The IRS updates the standard deduction amount each tax year to take into account inflation, and the amount you can deduct depends on your marital status, age, and if you're blind. The standard deduction lowers your taxable income to help lower your federal tax bill.
If it reduces your AGI enough, a portion of your taxable income could fall to a lower tax bracket, saving you more on taxes. You can also deduct several different personal expenses from your taxable income each year. Most people choose the standard deduction because it is greater than the itemized deductions they could request, but some do so because it is easier than identifying and adding up the expenses they could itemize or because they don't know that itemizing would reduce their tax liability. The maximum amount of the earned income tax credit (EITC) 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 should work 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. 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.
