Lesson 1 of 7
In Progress

Standard vs. Itemized Deductions

Chris Test January 4, 2021

After tallying up a taxpayer’s total income and subtracting the total amount of adjustments they qualify for, we have the taxpayer’s Adjusted Gross Income, or AGI. All taxpayers are allowed to take an additional deduction from their AGI before we calculate their total tax due.

Deductions are subtractions from a taxpayer’s AGI. They reduce the amount of income that is taxed. Most
taxpayers have a choice of taking a standard deduction or itemizing their deductions. When taxpayers have
a choice, they should use the type of deduction that results in the lower tax.

Standard Deduction

The IRS allows all taxpayers to take a standard deduction primarily based on their filing status and age. The Standard deduction is automatically calculated in the tax software, however, it is useful to know the standard deduction amounts for purposes of the certification test and to check your work throughout the tax prep process.

Standard Deduction Amounts for 2020
  • Single and Married Filing Separately
    • $12,400
  • Married Filing Jointly and Qualifying Widower
    • $24,800
  • Head of Household
    • $18,650

Variations in the Standard Deduction Amount

The standard deduction may increase or decrease from the above amount depending on the taxpayer’s age, whether or not they are blind, or if they are considered a dependent of someone else.
For taxpayers who are over age 65 or blind, their standard deduction will increase by $1,650. This $1650 applies to each taxpayer and each qualifying characteristic. For example, if a single taxpayer is both over age 65 and blind, they will receive an additional $3300 to their standard deduction, for a total of $15,700.

Taxpayers who are considered a dependent may technically receive a smaller standard deduction based on their earned income. For example, if a dependent student earned $1,000 during the year, their standard deduction will be capped by their earned income + $350, for a total of $1,350. In practice, this situation is rarely insignificant for VITA returns, but it may be helpful to know if you see an unexpected standard deduction amount on a dependent’s return.

Itemized Deductions

Some taxpayers may have more qualifying expenses during the year than the standard deduction, and these taxpayers are allowed to itemize their deductions. By itemizing, taxpayers enter in all of their qualified expenses during the year, and this amount is subtracted from their total income rather than the standard deduction.

Most VITA clients will benefit more by taking the standard deduction, as the federal standard deduction is quite high. However, we recommend inputting any qualified deductions the taxpayer provides, as the tax software will automatically calculate the best option. Additionally, while the federal standard deduction is quite high, the Kentucky standard deduction amount for 2020 is only $2,650. While most taxpayers will take the federal standard deduction, many will itemize their deductions on the Kentucky state return.

Qualified Expenses for Itemized Deductions

Many taxpayers are eager to claim all of their expenses during the year, as they believe it will amount to far more than $12,400 or their standard deduction amount. However, not all expenses are qualified expenses for the purposes of claiming itemized deductions, and some have additional limitations built into them. A list of the most significant itemized deductions are included below.

  • Medical Expenses over 10% of AGI
    • Taxpayers are allowed to claim any unreimbursed medical expenses, over 10% of their income.
      • These expenses are limited to what the taxpayer actually paid during the year and do not include any amounts covered by insurance or amounts they were billed but did not pay.
      • Additionally, medical expenses do not count towards itemized deductions until they pass a threshold of 10% of a taxpayer’s AGI.
        • For example, if a taxpayer has an AGI of $20,000 and paid a total of $5,000 in unreimbursed medical bills, only the amount over 10% of their AGI will count towards their total itemized deductions.
        • $20,000 x .10 = $2,000
        • $5,000 – $2,000 = $3,000 of eligible medical expenses they may claim towards itemized deductions.
  • Certain Taxes paid during the year
    • Taxpayers may claim some taxes paid during the year as itemized deductions, including”
      • State and Local Income Tax or State sales tax
        • State and Local income tax is calculated automatically by the tax software based on income documents.
        • Sales tax is entered in manually
        • Generally, it will be far more beneficial for the taxpayer to claim income taxes unless they made a significant purchase during the year or they paid little income tax.
      • Real Estate Taxes
      • Property Taxes
  • Home Mortgage Interest Paid
    • Homeowners with a mortgage will typically claim interest paid on their mortgage during the year
    • This is reported on a Form 1098
    • Many homeowners will have a total mortgage interest paid of over or around $2,650, and thus it may be beneficial for these taxpayers to itemize on the state tax return.
  • Charitable Contributions
  • Gambling Losses up to the extent of winnings