It’s never a good idea to try to hide income from the government, but the goal every tax season is to try to reduce your taxable income by as much as humanly possible. The best legal way to do that is by getting the most out of your deductions.
The Future of Finances: Gen Z & How They Relate to Money
Read: 3 Signs You’re Serious About Raising Your Credit Score
You have two options.
You can knock it out in one fell swoop with the flat-rate standard deduction or sum it all up dollar-by-dollar through the process of itemization.
Which method is right? The one that keeps more of your income out of the IRS’ crosshairs.
The Standard Deduction Makes Sense for Almost Everyone — Right?
The Tax Cuts and Jobs Act (TCJA) of 2017 spelled the end for some of the most commonly claimed deductions, like tax preparation fees and moving expenses. Several other key deductions were also significantly scaled back.
Make Your Money Work
The tradeoff was that the standard deduction nearly doubled from $6,500 to $12,000 for individual filers and from $13,000 to $24,000 for married couples filing jointly. For tax year 2023, it’s 13,850 and $27,700, respectively.
Itemizing had always been tedious and time-consuming thanks to tallying expenses and saving receipts. But with so many key deductions now gone and/or reduced, and the simple and easy flat-rate standard deduction expanded so greatly, you might think that the latter would be a no-brainer for the vast majority of taxpayers.
The results of a new GOBankingRates survey of approximately 1,000 American adults from all over the country found that just 22% of respondents plan to take the standard deduction, which means that more than three out of out of four taxpayers plan to itemize.
Are they making the right decision? The answer, of course, is that it depends.
First Thing’s First — Some People Don’t Have a Choice
Most taxpayers can take the standard deduction as long as they don’t itemize. A few specific populations, however, cannot, including:
A married person filing as married filing separately with a spouse who itemizes
Anyone who was a nonresident alien or dual-status alien during the tax year
People who file a return for a period of fewer than 12 months because of a change in their annual accounting period
An estate or trust, partnership or common trust fund
So, When Does It Make Sense To Itemize?
The formula for choosing is simple. If your total itemized deductions are greater than the standard deduction for your filing status, it makes sense to itemize. If it’s not, it doesn’t.
Before you decide, see which deductions you qualify for, including deductions for:
Business use of a car
Student loan interest
You’re most likely to benefit from itemizing, however, if:
You had large uninsured medical or dental expenses: You can deduct any amount over 7.5% of your income.
You paid mortgage interest: The TCJA reduced the deduction from $1 million, but you can still deduct on mortgages up to $750,000.
You paid property taxes: The TCJA capped the amount of property taxes you can deduct, but you can still write off up to $10,000.
You had large uninsured theft or casualty losses from a federally declared disaster: You might be able to deduct the entire loss.
If You Do Itemize, Make Sure You Get It Right
If you take the standard deduction, not only will your tax season be simpler and easier, but there’s really no way to mess it up. This is not the case with itemization, which requires meticulous attention to detail.
If you do itemize, you’ll have plenty of opportunities to fudge the numbers and try to keep more income shielded from the IRS than you’re allowed — don’t.
Unusual or large deductions, missing income and deductions with round numbers are among the biggest red flags that trigger IRS audits. In all of recorded human history, there’s never been a single case of an IRS audit making someone’s life easier, and if you are audited, you’ll have to prove and account for every deduction you claimed. If you can’t, the IRS is not known for empathy, understanding or playing nice.
The most popular tax software programs guide you through the itemization process and then let you see how the total stacks up side-by-side against the standard deduction. Remember the formula — whichever number is bigger is the right number for you.
More From GOBankingRates
Cynthia Measom contributed to the reporting of this article.
Methodology: GOBankingRates surveyed 1,000 Americans aged 18 and older from across the country between January 31 and February 1, 2021, asking six different questions: (1) How do you plan on filing your taxes for this year?; (2) When do you expect to file your taxes this year?; (3) How much do you expect to receive in a tax refund?; (4) What do you plan to do with your refund? (Select all that apply); (5) Do you feel confident you are receiving all the deductions you feel qualified for?; and (6) If you received the Child Tax Credit this past year (2021) how do you feel it will affect your taxes? All respondents had to pass a screener question of: Do you plan to file taxes in 2022?, with an answer of “Yes”. GOBankingRates used PureSpectrum’s survey platform to conduct the poll.
This article originally appeared on GOBankingRates.com: Only 22% of Americans Plan To Take the Standard Deduction, but Is Itemizing Actually Worth It?