This story is part of Tax 2023, CNET’s coverage of the best tax software, tax tips and everything else you need to file your return and track your refund.
“Should I itemize the standard deduction or itemize?” remains one of the biggest questions American taxpayers ask every tax season. The question became even more difficult after 2017, when the standard deduction was increased significantly.
Robert Rodriguez/CNET
Deductions are adjustments that you declare on your annual tax return to reduce your taxable income. Lower taxable income results in a lower tax bill. There are many opportunities for deductions, but if you elect to take them, you must itemize them clearly before submitting your tax paperwork to the IRS.
Itemized deductions can quickly become confusing, so in 1944 the IRS introduced the standard deduction, which lets you forgo itemizing deductions and instead agree to make a flat adjustment to your adjustable gross income, or AGI. . The standard deduction for the 2022 tax year is $12,950 for single filers, $19,400 for heads of household, and $25,900 for joint filers.
The standard deduction is the better deal for most taxpayers and will result in a lower tax bill. However, if you have a certain life event or unexpected expense in 2022, such as a large medical bill or buying a home, itemizing your deductions instead could save you more money.
It’s worth knowing about the difference between the standard and itemized deductions here.
What is the standard deduction for income taxes?
The standard deduction is a flat adjustment to your adjusted gross income, and it’s what most Americans take when they file their taxes. In the 2019 tax year, 87.3% of Americans took the standard deduction, according to IRS data.
Many people take the standard deduction because it’s too high, said certified public accountant Crystal Pino, owner of Nomad Tax, a tax consultancy for digital nomads. “Otherwise it’s really hard to reach that threshold unless you have significant charitable deductions,” Pino said.
The standard deduction is applied to your AGI to arrive at your taxable income, which is the number used to calculate your tax bracket and how much you owe each year.
What are itemized deductions on income taxes?
If you spent more than $12,950 in eligible deductions as an individual, itemizing your deductions instead would result in lower taxable income. According to the IRS website, you should consider itemizing your deductions if you:
- Cannot use the standard deduction, or the amount you can claim is limited.
- Had large unreimbursed medical and/or dental expenses.
- Pay mortgage interest or real property taxes on your home.
- The big one was “other itemized deductions” as defined by the IRS.
- Nonreimbursable accident or theft damage was greater than a federally declared disaster.
- Made a large contribution to a worthy charity.
You then document these individual deductions using a Schedule A form, and include them with Form 1040 to complete your tax return.
Be aware that the limits on these deductions are sometimes very high. In the medical expenses category, you can deduct out-of-pocket expenses on your federal tax return only if they exceed 7.5% of your adjusted gross income in a given year.
Read moreBest Self Employed Tax Software for 2023
Should I itemize if I have self-employment income?
The good news: If you had self-employment income in 2022, you can deduct expenses related to that income while still taking the standard deduction. Profits and losses from a business are documented on Schedule C, which is then attached to your federal tax return.
If you received a 1099 from side hustle, freelancing or other independent contractor work, this income and any expenses associated with it go on Schedule C, even if you don’t have a registered business. When individuals engage in business activity or gig work, the IRS classifies them as sole proprietors for tax classification purposes. The most common type of 1099 documenting this work is Form 1099-NEC, which is a non-employee compensation document.
This applies whether you’re a contractor, gig worker or driving for a service like Lyft or DoorDash, said Christina Taylor, Cash App tax expert and head of e-file operations for Cash App. Self-employment expenses, such as the work equipment or home office deduction, are deducted on your Schedule C, which is separate from the Schedule A used to itemize personal deductions.
Read more: Cash App Tax Review 2023: Best Free Online Tax Software
“The self-employed are the only group everyone talks about who take a big cut in the home office,” Taylor said. “If you’re using the Internet at home for your business, you can deduct that, too.”
You still have to pay self-employment tax, but you have the option of writing off the expenses.
Get a running start on your taxes today
As you organize yourself for tax season, know that the itemized deduction isn’t for everyone. If you had unexpected medical expenses or other major financial changes in 2022, it’s worth making sure you get the best possible refund.
more tax coverage
Source: www.cnet.com
