April is National Financial Literacy Month. To mark the occasion, MarketWatch will publish a series of “Financial Fitness” articles to help readers sharpen their fiscal health, and offer advice on how to save, invest and spend their money wisely.
Taxable income, by its name, is the amount of money that is subject to tax after applying all the eligible exemptions and deductions.
In the process of shrinking their taxable income, people have a powerful and straightforward choice at their fingertips: the standard deduction.
The overwhelming number of taxpayers currently opt for the standard deduction instead of their other choice, which is itemizing deductions.
if you take the standard deduction, however, you may not claim itemized write-offs for charitable donations.
There’s good reasons why the standard deduction is good bet for many people.
How much is the standard deduction for 2022?
For tax year 2022, the standard deduction is $12,950 for an individual taxpayer and for married individuals who are filing separately. It is worth $19,400 for people filing as heads of household. It is worth $25,900 for married couples filing jointly.
There are additional standard deductions for certain taxpayers. That includes people who are legally blind taxpayers, and people who are at least 65 years old. The additional sums can vary depending on age and filing status. The Internal Revenue Service breaks down the scenarios here.
For tax year 2023 — the income tax returns people will file in early 2024 — the amounts increase.
The standard deduction is $13,850 for single filers and married individuals filing separately. It is worth $20,800 for people filing as heads of household. It is worth $27,700 for married couples filing jointly. Again, additional standard deductions apply for legally blind taxpayers, and people who are at least age 65.
Should I take the standard deduction?
Taxpayers can either take the standard deduction, or they can itemize their deductions.
Itemized deductions include: certain forms of paid interest (such as mortgage interest), medical expenses, state and local taxes, charitable contributions, casualty and theft losses connected to a federally-declared disaster and gambling losses.
If the sum of the potentially itemized deductions is larger than the standardized deduction, itemizing is likely the best bet. But if the size of the standard deduction exceeds the potential itemized deductions, the standard deduction is likely the best bet.
Some people may have no choice but to itemize. For example, there’s a twist for married couples who file separately. A married individual filing separately is not entitled to the standard deduction if their spouse is itemizing deductions in their own return, according to the IRS.
How many people take the standard deduction?
A lot. Through late November 2022, the IRS received 154.3 million individual returns for tax year 2021 and 139.2 million of those returns claimed the standard deduction. That’s 90% of all those returns.
Keep in mind that states may also offer their own standard deductions for state-level income tax returns. While some states tie their standard deduction to the federal version, others set different amounts and some state do not offer one, according to the Tax Foundation.
Why does the standard deduction increase?
The standard deduction’s payouts increase because it is indexed to rise with inflation. From tax year 2021 to tax year 2022, the size of the standard deduction is growing by roughly 7%.
The IRS typically announces these increases in the fall.
This post was originally published on Market Watch
