19 Feb 2018

What is a ‘Standard Deduction’

The IRS standard deduction is the portion of income that is not subject to tax and that can be used to reduce a taxpayer’s tax bill. A standard deduction can only be used if the taxpayer does not choose the itemized deduction method of calculating taxable income.

The amount of the standard deduction is based on a taxpayer’s filing status, age, and whether he or she is disabled or claimed as a dependent on someone else’s tax return.

BREAKING DOWN ‘Standard Deduction’

The income tax is the amount of money that the federal or state government takes from your taxable income. It is important to note that taxable income and total income earned for the year are not the same. This is because the government allows a portion of the total income earned to be subtracted or deducted to reduce the income that will be taxed. The taxable income is usually smaller than total income due to deductions, which help to reduce a taxpayer’s bill.

A taxpayer can select one of two types of deductions: itemized deduction or standard deduction. Whichever one he chooses is up to him, but he cannot use both to reduce his income. The itemized deduction option allows the taxpayer to list out all of his or expenses for the year such as property tax, medical expenses, eligible charity donations, gambling losses, unreimbursed business expense, and other costs incurred that have an effect on your bottom line tax figure. Normally, if the total value of itemized deductions is higher than standard deduction, the taxpayer would itemize. Otherwise, s/he would opt for the standard deduction.

2017 Standard Deduction Amounts

The standard deduction is a flat amount that the IRS allows all qualified taxpayers to deduct from their income every year. This amount increases each year as it is adjusted for inflation. A taxpayer who qualifies for standard deduction can subtract the authorized amount from his or her gross income to lower the amount that is subject to tax. The standard deduction for 2017 are as follows

  • $6,350 for single tax payers
  • $6,350 for married taxpayers filing separately
  • $12,700 for married taxpayers filing jointly
  • $9,350 for heads of households

A single individual with gross income of $80,000 for 2017 can reduce his income by $6,350 to reduce his taxable income to $73,650. If his effective tax rate is 19.67%, he’ll end up paying 19.67% x $73,650 = $14,486.96. Without the standard deductions, his tax bill would be higher at 19.67% x $80,000 = $15,736.00.

Not all taxpayers qualify for the standard deduction though. An individual (or his spouse, if filing jointly) who was a non-resident alien at any time of the year; a married person filing separately but whose spouse itemized his or her deductions; an estate or trust; are examples of entities who cannot claim standard deductions.

The federal income tax system and some states have higher standard deductions for people who are at least 65 years old and for people who are blind. A certified statement from an eye doctor would be needed as proof for claiming a higher deductible due to total or partial blindness.

The biggest reason taxpayers use standard instead of itemized deductions is that taxpayers don’t have to keep track of every possible tax-deductible expense throughout the year. Plus, many people find the standard deduction amount to be generous and usually greater than the total they could reach if they added up all their tax-related expenses separately.

2018 Standard Deduction Amounts

For 2018 taxes filed in April 2019 the standard deduction will increase as follows

  • $12,000 for single taxpayers
  • $12,000 for married taxpayers filing separately
  • $24,000 for married taxpayers filing jointly
  • $18,000 for heads of households

The new standard deduction amounts are set to expire Dec. 31, 2025.

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