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.

Jump to:

• What are standard deductions?
• What are itemized deductions?
• Common itemized deductions
• Miscellaneous itemized deduction
• Pros and cons of standard deduction vs itemized
• Example of standard deduction vs itemized
• Tips for preparing to itemize
• State tax considerations
• Finding peace of mind at tax time
• Standard deduction vs. itemized FAQ

What are standard deductions?

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. 

Standard deduction amounts for the tax year 2024: 

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

Standard deduction amounts for tax year 2025:

• Single or Married Filing Separately: $15,000 (up $400 from 2024)
• Married Filing Jointly: $30,000 (up $800 from 2024)
• Head of Household: $22,500 (up $600 from 2024)

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.

Common itemized deductions

Itemizing your deductions can significantly reduce your taxable income if your total qualifying expenses exceed the standard deduction. While it requires tracking receipts and filling out Schedule A, the potential tax savings can make it worthwhile.

High medical expenses, mortgage interest, charitable contributions, and state and local taxes are some of the most common deductions. If these apply, itemizing could save you more than the standard deduction. Just be mindful of qualification thresholds and deduction limits to ensure you’re making the most of this option.

Let’s explore some examples.

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. 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 for nonprofits and religious organizations and can 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 tax (SALT) deduction strategies

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. 

Casualty and disaster losses  

If you experience damage or loss due to a federally declared disaster, you may be eligible for a deduction. To qualify, the loss must not be covered by insurance or other reimbursements and must exceed 10% of your AGI. This deduction applies only to losses in federally declared disaster areas and requires thorough documentation of the damage and costs.

Miscellaneous itemized deduction

While many taxpayers focus on the more common deductions, there are several lesser-known options that can help reduce your taxable income. These deductions often require specific qualifications but can add up to significant savings if you know where to look.

• State Sales Tax: Instead of state income tax, you can deduct state sales tax, which is especially beneficial if you live in a state with no income tax.
• Tax Preparation Fees: Fees for preparing your tax return, including software costs, may be deductible if you itemize.
• Home Office Deduction: If you use part of your home exclusively for business purposes, you may be eligible for a deduction, including a portion of your rent, utilities, and repairs.
• Qualified Charitable Distributions (QCDs): Individuals aged 70½ or older can donate up to $100,000 directly from an IRA to charity, which counts toward the required minimum distribution (RMD) and is not taxable.
• Unreimbursed Employee Expenses: Certain out-of-pocket work-related expenses, like uniforms or tools, might still be deductible under specific circumstances.
• Educator Expenses: Teachers can deduct up to $300 of unreimbursed expenses for classroom supplies or $600 if both spouses are eligible and file jointly.

Pros and cons of standard deduction vs itemized

Standard deduction 

The standard deduction is a fixed amount set by the IRS that reduces your taxable income without requiring proof of expenses. It’s simple, requires no extra paperwork, and is often the default choice for taxpayers without significant itemized expenses. 

The amount varies based on your filing status and offers additional deductions for those who are 65 or older or blind. 

Convenience: The IRS sets the amount, which adjusts annually.

Additional benefits: If you're 65 or older or blind, you get an extra $2,000 for 2025.

Limitations: Married filing separately? Both spouses must either itemize or take the standard deduction. If someone claims you as a dependent, your standard deduction is smaller.

Itemized deductions 

Itemized deductions allow you to deduct specific expenses, such as medical bills, mortgage interest, and charitable donations, but require detailed record-keeping and filing Schedule A. 

This option is beneficial for taxpayers with deductible expenses that exceed the standard deduction, although it requires more effort and is subject to certain caps and limitations.

Higher potential deduction: Itemizing might save more if you:

• Have high medical expenses.
• Pay mortgage interest.
• Claim other eligible expenses.

Limitations: Requires more effort to track expenses and follow the rules. Some limits apply, like caps on 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. 

In that example, the best choice was itemized deductions. The standard deduction is often the best choice for taxpayers with few significant deductible expenses. 

Here are common scenarios where it’s optimal:

• Low out-of-pocket expenses: If you don’t have substantial medical bills, mortgage interest, or charitable donations, the standard deduction is likely more advantageous.
• Simple tax situations: Taxpayers with straightforward finances, such as renters or those without dependents, usually benefit from the simplicity of the standard deduction.
• Dependents with limited income: If someone claims you as a dependent and your income is low, you’re generally better off taking the standard deduction.
• Time constraints: If gathering receipts and calculating itemized deductions seems daunting or time-consuming, the standard deduction saves effort while still reducing taxable income.

Tips for preparing to itemize

Proper preparation makes itemizing your deductions easier and ensures you don’t miss out on potential savings. Here are some tips to streamline the process:

• Year-round recordkeeping: Maintain a dedicated folder or digital archive for all deductible expenses throughout the year. Regularly review and categorize expenses like medical bills, charitable contributions, and property taxes to avoid last-minute scrambles.
• Gathering documentation: Collect essential tax forms, such as Form 1098 for mortgage interest and receipts for charitable donations, medical expenses, and other deductible items.
• Use tools and apps: Tax software like TurboTax and QuickBooks can help you track expenses and estimate deductions. Apps like Expensify or Evernote make it easy to digitize and categorize receipts on the go, keeping everything accessible during tax season.

State tax considerations 

State tax rules can significantly impact your decision to itemize, as deductions and credits vary by location.

• Why state tax rules matter: Some states do not allow the standard deduction, requiring you to itemize. Others have unique rules or offer additional deductions that can increase your overall savings.
• States where itemizing saves more: In states with high property taxes, such as New York or California, itemizing can lead to greater savings due to the ability to deduct these costs. States with no income tax, like Florida or Texas, make the state sales tax deduction particularly valuable.
• Federal vs. state deductions: While federal rules often guide your decision, state tax laws may differ. Some deductions allowed at the federal level, like SALT, might have limits or exclusions at the state level. Always review both sets of rules to maximize your benefits.

Finding peace of mind at 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.