Standard deduction vs. Itemized: Which one should you pick?

Filing your taxes accurately as a business owner requires planning and expense tracking. Getting the most out of your taxes means understanding what deductions you can take.

When you fill out your 1040 form, you’ll have to decide whether to use the standard deduction vs. itemized deductions to reduce your taxable income. Let’s look at how personal tax deductions work and how to pick the one that’s best for you:

What is a standard deduction?

The standard deduction lowers your income by a set amount. On the other hand, itemized deductions are eligible expenses you can claim. Both options will reduce your tax bill, but you can only take one.

However, the standard deduction amount varies according to your filing status. 

Here are the standard deduction amounts for tax year 2023:

• Single or married filing separately: $13,850
• Married filing jointly: $27,700
• Head of household: $20,800

Here are the standard deduction amounts for tax year 2024: 

• Single or married filing separately: $14,600
• Married filing jointly: $29,200
• Head of household: $21,900

The general rule of thumb is that you’ll take the standard deduction when it’s larger than your itemized deductions. 

What are itemized deductions? 

For your itemized deductions, you’ll need to keep track of receipts for allowed itemized expenses and add them up to see if the amount is higher than the standard deduction. You’ll also have to report the amounts on Schedule A for your Form 1040. The amount of qualified expenses for itemized deductions will vary by year. 

If you decide to itemize your deductions or want to calculate how much the deduction would be, you'll need to know the key types of expenses to look at.

Here are the most common expenses you’ll include in your itemized deductions:

Medical expenses

You can deduct a percentage of unreimbursed medical and dental expenses you pay. For example, doctor payments, hospital care, and prescriptions. To qualify, these expenses must be out of pocket, meaning you did not receive reimbursement.

You can only deduct medical and dental expenses that are greater than 7.5% of your adjusted gross income (AGI). If your total expenses are below the 7.5% floor, they are not deductible at all. For example, if your AGI is $75,000 and you have $7,500 in medical expenses, you can only deduct $1,875.

Mortgage interest

You can deduct the interest you pay on a home loan. However, there are mortgage interest limits. The deduction is only for the first $750,000 in mortgage debt for your first or second home. Or $375,000 for married couples filing separately.

Charitable contributions

You can also include contributions to charities in your itemized deductions. You can only deduct up to 60% of your AGI for cash contributions. The limit is lower for other types of charitable contributions, such as property. 

Donations can include those to nonprofits and religious organizations and be in the form of cash, property, or out-of-pocket expenses. 

Contributions of $250 or more require a letter from the charity for tax documentation purposes. 

State and local taxes

You also can elect to deduct either state and local income taxes or state and local sales taxes, but not both. Most taxpayers choose to deduct income taxes because the dollar amount is larger. Then, you can also deduct property and real estate taxes. 

Your deduction of state and local taxes and property taxes is limited to $10,000, or $5,000 if married filing separately.  

Note you can also itemize other expenses, such as casualty and theft losses from a federally declared disaster or gambling losses. 

Pros and cons of standard deductions vs. itemized

The main reason individuals opt for taking the standard deduction on their tax returns is that it’s more convenient. The IRS sets the amount and typically increases it yearly. 

The standard deduction can also be a larger amount for set groups. For example, If you’re 65 or older or blind, you get an additional deduction of $1,550 for 2024. However, standard deductions do have some filing limitations. If you are married but filing separately, you cannot take the standard deduction if your spouse itemizes. 

Both of you must either take the standard deduction or itemize. Also, if someone can claim you as a dependent on their tax return, you get a smaller standard deduction.

When deciding whether you should itemize deductions, many tax filers go this route because it can be greater than the standard deduction. If you have a lot of medical expenses, pay mortgage interest, or have many other eligible expenses, your itemized deduction might be greater than your standard deduction. 

However, itemizing does take more time and effort, including understanding the rules and keeping proof of your expenses. At the same time, there are restrictions on the eligible expenses that you’ll need to be mindful of, such as the cap mortgage interest. 

Example of standard deduction vs. itemized

Choosing between the standard deduction and itemizing comes down to the amount. For example, say you’re a single taxpayer with an adjusted gross income of $40,000. You pay a large amount in mortgage interest and property taxes and track your expenses to find that you spent a lot in unreimbursed medical costs. 

You add up your possible itemized deductions, and the total is $16,500. However, the standard deduction for the 2023 tax year is $13,850. Since the itemized deduction is higher, you should itemize. 

Find peace of mind come tax time

Tax preparation can be time-consuming, but getting the most out of your available tax deductions saves you money. Deciding whether to pick the standard deduction vs. itemized means tracking your expenses. 

Accounting software like QuickBooks Solopreneur can help you organize your expenses and track your possible tax deductions. This includes tracking your business expenses like advertising and vehicle use, helping lower your tax bill even more.