Most Americans Don’t Know the Standard Tax Deduction Amount: Here Are the Top Details To Know
It’s that time of the year again, and while doing taxes is not the most pleasant task, there’s no way around it. One of the first questions Americans should consider is whether to take the standard tax deduction or whether to itemize.
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But a new GOBankingRates survey found that a staggering 90% of Americans don’t actually know the standard tax deduction amount, hence making that decision potentially complicated.
“People hear the phrase ‘death and taxes’ and think neither can change. While death doesn’t change, taxes certainly do. Or rather, the rules governing them change all the time,” said Howard Dvorkin, CPA and chairman of Debt.com. “The most important fact to know is that deductions come in two flavors: standard and itemized. Each reduces your taxable income. Sadly, you can’t use both at the same time. You must choose.”
In turn, it’s not surprising that 13% say that they don’t feel confident they are receiving all the deductions they feel qualified. What is surprising, however, given the lack of knowledge around the topic, is that 22% of the survey respondents said they are taking the standard deduction, the survey showed, despite most people not knowing how much it is worth.
The most important thing to know is that you get to take whichever is higher, between the standard tax deduction and itemizing, said Edward Lyon, chief tax strategist at Financial Gravity.
“Also, you can switch from year to year, so you never lock yourself into one or the other,” Lyon added. Keep reading to find out more about the standard deduction and whether or not you should take it.
What Is the Standard Tax Deduction?
The standard deduction is a specific dollar amount that reduces the amount of income on which you’re taxed, the Internal Revenue Service (IRS) explains, hence, lowering your taxes.
The preset amount depends on your filing status: single, head of household, married filing jointly or married filing separately, as well as your age and/or if you’re blind. Generally, it is adjusted each year for inflation.
“As the name implies, a standard deduction is a fixed number. But even that varies according to factors like your health and your love life. For example, if you’re married and filing jointly, your standard deduction will be different than if you file by your lonesome. And if you’re blind or over 65, you get a heftier deduction, which means the IRS charges you less tax,” Dvorkin said.
The bulk of Americans pick this option — which is easier than itemizing. For example, in 2019, for tax year 2018, 87% of taxpayers chose the standard tax deduction, according to the IRS.
“The key is not to memorize exactly what the standard deduction is but to understand if you will use it or not,” said Jay Zigmont, PhD, CFP, founder of Childfree Wealth. “If you used the standard deduction last year there is a good chance you will use it again this year unless you had some extreme expenses (such as in healthcare expenses exceeding 7.5% of your income) that are different from last year. “
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What Are the Specifics?
For taxes this yea — the ones you are filing in 2023 for 2022 income — here are the standard tax deduction amounts:
- Single: $12,950
- Single age 65+: $14,700
- Married filing jointly: $25,900
- Head of household: $19,400
- If you’re blind or 65 or older: There is an additional deduction that ranges from $1,400 to $1,750, depending on the filing status.
- If you’re blind and 65 or older: There is an additional deduction, which ranges from $2,800 to $3,500, depending on the filing status.
And for the 2023 tax year, which you will fill in 2024, the IRS said it would adjust the amounts by 7% due to the extremely high inflation, “the largest automatic adjustment to the standard deduction since core features of the tax system were first indexed to inflation in 1985,” according to The Wall Street Journal.
The standard deduction for married couples filing jointly for tax year 2023 rises to $27,700, up $1,800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction will be $13,850 for 2023, up $900, and for heads of households, the standard deduction will be $20,800 for tax year 2023, up $1,400 from the amount for tax year 2022, the IRS said.
Because the standard deduction is adjusted over time, it’s worth checking every year when you do your taxes, said Richard Barrington, financial analyst for Credit Sesame.
“However, it is adjusted with a bit of a lag compared to the inflation rate consumers are experiencing. So, for example, the standard deductions for the 2022 tax year — meaning those you’d use for the returns taxpayers must file by April 18, 2023 — are up just over 3% from the prior year. That’s well below 2022’s inflation rate,” he added. “However, the IRS has already announced a larger percentage increase (about 7%) for 2023 tax returns, which people will be filing in early 2024.”
Who Is Not Eligible?
The IRS explains that certain taxpayers aren’t entitled to the standard deduction, they include:
- A married individual filing as married filing separately whose spouse itemizes deductions
- An individual who was a nonresident alien or dual status alien during the year (there are exceptions)
- An individual who files a return for a period of less than 12 months due to a change in his or her annual accounting period
- An estate or trust, common trust fund, or partnership
“For separately filing married couples it could be an issue because if one spouse itemizes, the other must. Similarly, if one spouse used standard, the other must use standard,” said Tatiana Tsoir, CPA, business expert and founder of The Bold Method.
Standard Tax Deduction or Itemize Deductions?
It comes down to simple math (and eligibility). If your itemized deductions are greater than your standard deduction, then that option would be the most beneficial.
The IRS says that taxpayers may benefit by itemizing under certain circumstances. These include if you can’t use the standard deduction, if you had large unreimbursed medical and dental expenses, if you paid mortgage interest or real property taxes on your home or made large contributions to qualified charities.
According to Lyon, while it’s a straightforward matter to see if the total of those deductions is more than the standard amount, itemizing deductions usually makes sense only for taxpayers who are paying mortgage interest on a more-expensive-than-usual house or who are making significant charitable gifts.
Another point to take into consideration when considering your options is that itemized deductions are very specific and include limits, he added.
They include unreimbursed medical expenses, but only to the extent they exceed 7.5% of your “adjusted gross income;” state and local taxes, but only up to $10,000; mortgage interest, but only on $750,000 of mortgage debt; and they include charitable gifts, but only above the $300 single/$600 married amount you can deduct without itemizing, he said.
Another important point when you itemize is that some experts say you have a higher risk of an audit, while with the standard deduction you get a “minimum living allowance” that is not the subject of an audit, according to Tsoir. “Standard deduction is great for head of household and for married filing jointly. Due to state income+ property tax deduction limit of 10k total, it may make sense to use standard even if your taxes are high. You may not get enough. And if it’s very close, standard deduction will lower your audit risk.”
Finally, Debt.com’s Dvorkin said that while itemized deductions are much more complicated and time-consuming, they might save you a lot more money.
“That’s because you can claim items big (like medical expenses) and small (like a portion of your car’s annual registration). But you need to really drill down on the details to make sure you’re following all the rules,” he said. “For every tempting itemized deduction, there are exceptions and conditions. Ignoring those irks the IRS — and besides your in-laws, there’s no one you want to keep happier than the IRS.”
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Methodology: GOBankingRates surveyed 1,002 Americans aged 18 and older from across the country on between January 30 and February 1, 2023, asking fourteen different questions: (1) How do you plan on filing your taxes for this year?; (2) When do you expect to file your taxes this year?; (3) How much do you expect to receive in a tax refund?; (4) What do you plan to do with your refund?; (5) Do you feel confident you are receiving all the deductions you feel qualified for?; (6) Do you believe your tax dollars are being spent effectively?; (7) Do you believe you are paying too much, too little, or a fair share in taxes?; (8) Have you ever been audited before?; (9) Who will/would use your tax dollars the best?; (10) How much is the standard deduction for a single filer (and married filers) in 2023?; (11) What concerns you the most about Tax Day?; (12) Do you expect your tax refund this year to be more or less than last year?; (13) What do you understand the least about your taxes?; and (14) What would you rather be doing than your taxes? (Select all that apply). GOBankingRates used PureSpectrum’s survey platform to conduct the poll.
