Understanding Standard Deduction
By Space Coast Daily // May 9, 2022
The word “standard deduction” refers to the non-taxable percentage of your income that can be utilized to lower your tax burden. The Internal Revenue Service (IRS) lets you to use the standard deduction if you do not itemize your deductions and utilize Schedule A of Form 1040 to calculate taxable income.
Your standard deduction is determined by various factors like filing status, age, and whether you are disabled or claimed as a dependent on another person’s tax return.
How much does the standard deduction cost?
Standard deductions reduce taxable income for taxpayers. As a result, only households with income above a certain threshold will be subject to income tax. Taxpayers can request a flat-rate deduction on their tax returns. This reduces taxable income and unpaid tax. Taxpayers or their spouses can claim additional deductions in addition to the standard deductions if they are 65 years of age or older or visually impaired.
Rather than accepting the standard deduction, taxpayers can itemize their deductions. Approximately 70% of taxpayers previously chose the standard deduction. The majority chose it because it was more than the itemised deductions they could claim, but others chose it because it was easier than researching and calculating the costs they could itemise or because they didn’t realise itemising would lessen their tax liability.
Shares of tax returns claiming the basic standard deduction, itemized deduction, and standard deduction with extra deduction in 2017 are depicted in a pie chart.
The Tax Cuts and Jobs Act (TCJA) increased the standard deduction for individuals from $6,500 to $12,000, married couples from $13,000 to $24,000, and heads of household from $9,550 to $18,000 in 2018. In 2018, the additional deduction for those 65 and older or blind was $1,300 ($1,600 if unmarried and not filing as a surviving spouse). As in previous years, the deduction amounts have been adjusted for inflation.
The standard 2020 deduction for single parents is $ 12,400, for couples $ 24,800, and for heads of household $ 18,650. An additional deduction for persons aged 65 and over or visually impaired is $ 1,300 ($ 1,650 if not declared as an unmarried and alive spouse).
The TCJA will raise the number of taxpayers who accept it by raising the standard deduction and imposing other restrictions on itemized deductions. According to the Urban-Brookings Tax Policy Center, about 90% of households will use the standard deduction rather than itemizing their deductions.
TCJA’S IMPACT ON TAXABLE INCOME THRESHOLDS
Prior to 2018, taxpayers could claim a personal exemption in addition to the standard deduction for themselves and their dependents. The standard deduction and personal exemptions were used to establish taxable income levels, ensuring that persons earning less than a certain amount did not have to pay any income tax.
In 2017, the standard deduction for any married couple was $12,700, $6,350 for a single filer while $9,350 for a head of household, with each personal exemption being $4,050. A married couple without children had taxable income of $20,800 (plus two personal exemptions), but a single person had taxable income of $10,400 (plus two personal exemptions) (the standard deduction plus one exemption). Couples and singles earning less than a certain amount were exempt from paying income tax.
In 2018, the Tax Cuts and Jobs Act (TCJA) increased the standard deduction while lowering the personal exemption amount to zero from $4,150. As a result of the elimination of personal exemptions, some of the benefits of greater standard deductions were lost, resulting in a small increase in the taxable income threshold for individuals and couples. Because the majority of the TCJA’s individual income tax provisions are set to expire after 2025, taxable income levels would revert to what they would have been under previous law unless Congress extends or permanently extends the current law.
Not Eligible for the Standard Deduction
The standard deduction is not available to the following taxpayers:
1. If you and your spouse both itemise deductions, you can file as married filing separately.
2. An individual who was a nonresident foreigner or a dual-status foreigner during the year (see below for certain exceptions)
3. An individual who submits a return for a period less than 12 months due to a change in his or her yearly accounting cycle.
4. Estates or trusts might take the form of a trust, a common trust fund, or a partnership.
Nonresident foreigners or dual-status foreigners who were nonresident aliens or dual-status aliens throughout the year, on the other hand, may claim the standard deduction if they meet the following criteria:
■ A nonresident foreigner who, at the conclusion of the tax year, is married to a U.S. citizen or resident alien and elects to be categorised as a U.S. resident for the entire tax year with his or her spouse;
■ Non-resident foreigners who marry a U.S. citizen or resident at the end of the tax year and choose to be classified as a U.S. citizen or resident of the entire tax year in a joint election with their spouse are U.S. citizens or Resident’s tax year.
Zero personal deduction applies to all dependent deductions claimed by taxpayers. Meanwhile, TCJA has increased children’s allowances to compensate for the loss of personal allowances for many taxpayers with dependents. Taxpayers who earn more than their taxable income may be eligible for tax deductions such as income tax deductions and child tax deductions that can avoid paying income tax.