Clients often ask if their medical expenses have all been deducted from their income. This article demonstrates the difference between Standard Deduction and Itemized Deduction, and how each deduction items are applied to tax returns.
Individual taxpayers can choose between the Standard Deduction and Itemized Deduction for greater tax benefit. Taxpayers can make the choice each year, but cannot take both at the same time.
1. Standard Deduction
Standard Deduction is the fixed amount of income that is not subject to tax. Most taxpayers qualify for the deduction regardless of their expenditures during the year. The deduction amounts are different for each filing status and updated each year. For 2022, standard deduction amounts are as following:
| Filing Status | Standard Deduction |
|---|---|
| Single / Married Filing Separately | $12,950 ($14,700 if 65 or older/blind) |
| Married Filing Jointly / Qualifying Widow(er) | $25,900 ($27,300 if 65 or older/blind) |
| Head of Household | $19,400 ($21,150 if 65 or older/blind) |
2. Itemized Deduction
Itemized Deduction refers to the sum of a taxpayer’s deductible expenses during the year. The following items are includible in Itemized Deduction:
- Medical Expenses that exceed 7.5% of the gross adjusted income.
- Home mortgage interest up to the amount applicable to $750,000 average principal balance.
- State and local tax or property tax up to $10,000.
- Charitable contribution (Cash) up to 50% of gross income.
- Charitable contribution (Non-cash) up to 30% of gross income.
- Gambling losses up to the amount of gambling income.
The above expenses are reported on Schedule A and attached to Form 1040.
Example: assume a taxpayer with the following information.
| Filing Status | Married |
|---|---|
| Age | 45 & 41 |
| Adjusted Gross Income | $200,000 |
| Medical Expenses | $1,000 |
| Mortgage Interest Paid | $30,000 ($1,000,000 in average principal) |
| Property Tax Paid | $12,000 |
| Charitable Contribution | $1,000 |
The Itemized Deduction amount for this taxpayer is $33,500 calculated as following:
- $0 for medical expenses. The medical expenses does not exceed 7.5% of the taxpayer’s AGI.
- $22,500 mortgage interest expenses: $30,000 x ($750,000 / $1,000,000).
- $10,000 Property Tax.
- $1,000 Charitable contribution. The amount is below 50% of the total income.
The standard deduction for this taxpayer is $25,900. Since the itemized deduction amount is greater, the taxpayers can deduct $33,500 from their taxable income.
For married taxpayers who file separately from their spouse must use the same deduction as their spouses. If one spouse chooses standard deduction, the other should also use standard deduction even if his/her itemized deduction is greater than the standard deduction.