Each year, taxpayers have the choice to use itemize deductions or use the standard deduction, whichever is the most financially beneficial choice for them. The idea is that if your individual deductions add up to more than the standard deduction, it's worth itemizing (also known as the "long way" to do your taxes).
For the majority of Americans, itemizing is not worthwhile, and that's especially true now, thanks to the higher standard deductions that the Tax Cuts and Jobs Act put in place. The IRS recently announced the updated standard deduction for 2020, so here's what yours will be and what it will mean.
The 2020 standard deduction
For 2020, the standard deduction is rising by $200 to $400, depending on your filing status. To be clear, this is the amount of your adjusted gross income (AGI) that you can exclude from federal income taxes.
Here's a chart that can help you find your 2020 standard deduction and how much it's changed:
|Filing Status||2020 Standard Deduction||2019 Standard Deduction|
|Married filing jointly||$24,800||$24,400|
|Head of household||$18,650||$18,350|
|Single/married filing separately||$12,400||$12,200|
Data source: IRS.
Will itemizing deductions be worthwhile for you in 2020?
Not all tax deductions require you to itemize to take advantage. Just to name a few, you can still deduct your pre-tax retirement plan contributions and student loan interest regardless of whether you itemize.
Here's a quick check that can help you determine if you're likely to itemize deductions in 2020. There are several itemizable tax deductions, but the bulk of most taxpayers' deductions come from the "big four":
- Mortgage interest on as much as $750,000 in principal.
- Medical expenses in excess of 10% of your AGI.
- State and local taxes (SALT), including property taxes and state income or sales taxes, up to a maximum of $10,000 per year.
- Charitable contributions.
For most Americans, adding up these four deductions can be a good indicator of whether itemizing will be worthwhile. As an example, let's say you're married filing jointly with your spouse in 2020 and that you pay $8,000 in mortgage interest, paid $5,000 in state and local taxes, and donated $2,000 to charity. Your medical expenses were less than 10% of your adjusted gross income.
This gives you a total of $15,000 of itemizable deductions, which is substantially less than the $24,800 standard deduction to which you'd be entitled. So it's likely that you'll use the standard deduction on your 2020 tax return.
Good news if you typically use the standard deduction
If you're one of the majority of Americans who use the standard deduction every year, this is good news. In a nutshell, it means you'll get to exclude a little bit more of your money from taxation next year. If you're in the 22% tax bracket and single, this means that you'll save $44 as compared with the 2019 standard deduction. If you're married filing jointly, you'll save $88. And if you're in a higher tax bracket, your savings will be even more.
To be clear, this is an inflation-driven adjustment, and hopefully your wages grow from 2019 to 2020 as well. Even so, the higher 2020 standard deduction should help keep a little more money in your pocket.