Failing to Itemize
Most taxpayers view the standard deduction as nothing short of a gift from the IRS gods. The standard deduction was adopted in 1944 to give taxpayers a simplified way to deduct personal nonbusiness expenses from their taxable income. The original standard deduction was a flat 10 percent of income up to a maximum of $1,000, but the IRS began setting a figure for the standard deduction in 1970 [source: Tax Policy Center]. Here are the standard deductions for 2013 [source: IRS]:
- Single = $6,100
- Married filing separately = $6,100
- Married filing jointly = $12,200 (more if you or your spouse are 65 or older)
- Head of household = $8,950
- Qualifying widow(er) = $12,200 (more if you are 65 or older)
If you earn a modest income, those standard deduction figures are a huge help. But it's a big mistake to assume that the standard deduction is right for every tax situation. In some cases, the extra work of itemizing can save you a lot more money. Some examples [sources: IRS, IRS and IRS]:
- If you buy a house, you can deduct all mortgage interest on your primary residence.
- If you have significant medical expenses that aren't covered by insurance, you can deduct any amount that exceeds 10 percent of your adjusted gross income (7.5 percent if you or your spouse are 65 or older).
- If you give a substantial amount of money to charitable organizations, itemizing might be a better deal for you. Make sure to have receipts to back it up, though.