Differences Between Standard Deductions and Itemized Deductions
Most everyone knows you can deduct certain things from your income taxes. But what is a deduction? Deductions are different from Exemptions although both reduce your taxable income.
- Exemptions are determined by the number of persons taxpayers include on their tax return
- Deductions are allowed expenses which reduce the amount of income on which you are taxed
There are two main types of deductions, the standard deduction and itemized deductions on a Schedule A for Form 1040.
More about itemized deductions
Amounts you can itemize as a deduction can come on reporting forms, such as for home mortgage interest. Other deductions often have record keeping requirements for the deductions, such as for charitable giving or medical expenses. You should keep receipts, cancelled checks, and other written records of things you may use as a deduction.
You can choose to use either the standard or itemized deduction. If you file as Married Filing Separate, this ensures you and your spouse use the same type of deduction as required by law.
The standard deduction is a dollar to dollar reduction of your taxed income. Itemized deductions may have percentages attached which may not be dollar for dollar.
For example: Medical expenses must add up to more than a set percentage of your income before they begin to count as a deduction. If your adjusted gross income was $30,000, only the amount of medical expenses exceeding 7.5%, or $2250 ($30,000 X 0.075 = $2250), can be used as a deduction. In this example, if you had $3000 of medical expenses, only $750 ($3000 - $2250 = $750) would count as an itemized deduction.
Why your initial refund amount does not change
TurboTax always has the goal of maximizing your return, so we start by using the standard deduction for your return. It takes a few steps before we can get into your itemized deductions (if any) and add them up. That is why you don’t see the refund amount go up (or a tax due go down) when you first start entering deductions.
First, you have to add enough deductions to exceed the standard deduction. When we see your itemized deductions increase above the standard deduction amount, we can use the itemized deductions and your refund begins to grow.
Enter all of your deductions!
Even if you do not expect to be able to itemize your deductions, always enter all deductions you have. Some items may not help you on the federal return, but are used on a state return. Do not miss any deductions; enter everything and TurboTax will use them every place the deduction can help your tax situation!
Tip: In less common situations, some persons may benefit by selecting to itemize deductions on the federal return so they can itemize deductions on their state return. (States often require you to file the state return using the same filing status or selections as used on the federal return.) In this case, the state tax benefit of itemizing may be greater than any benefit lost on the federal tax return.
About other deductions
Deductions can be confusing because there are other deductions taxpayers can use to reduce taxable income whether you use either the standard or the itemized deductions. These appear in various places on your tax return.
They include such things as alimony, capital and business losses, moving expenses to a new job location, student loan interest, and IRA or other retirement plan deductions. Be sure to follow all of the TurboTax interviews to find all of the deductions you are entitled to.