We are in the thick of, yet again, another unusual tax season. In the last few years, there has been new tax law impacting what deductions you are eligible to take.
Today on Maximize, I’m giving you an overview of itemized vs. standardized deductions.
Each year, when you file your taxes you have the choice of taking a standardized or itemized deduction. What does that mean?
Standard Deduction
The standard deduction is a fixed amount you are allowed to deduct from your taxable income. This amount varies depending on your income and filing status.
For 2021, the standard deduction is:
- $12,550 for singles and married filing separately
- $18,800 for heads of household
- $25,100 for married filing jointly taxpayers
Itemized Deduction
Itemized deductions are expenses for personal use items that the IRS allows you to deduct. Itemized deductions were created to provide incentives for taxpayers to do certain things, like buy a house and make donations. These deductions include mortgage interest, real estate property tax paid, charitable contributions, medical expenses, and state and local taxes paid.
So… As a small business owner, should I itemize or take the standard deduction?
The short answer is: Take the larger of the two options!!!
When it comes to standard vs. itemized deductions, it doesn’t matter, to a large degree, if you are self-employed or not. Plus, the tax software used to prepare your tax return will generally choose the larger deduction for you…without you having to do anything special.
Because a standard deduction is…standard, meaning you cannot do anything to increase the number. Therefore the goal is to focus on trying to increase your itemized deductions so that it’s greater than your set standard deduction. Homeownership and donating to worthy causes are the two fastest ways to hike up your itemized deductions. The larger your itemized deductions, the lower your tax bill will be. It’s that simple.
Wait so there’s no tax benefit here specific to business owners?
No. Not when it relates to standard vs. itemized deductions. However, as a business owner, you have ample ways to reduce your tax bill. Do you know what expenses are deductible for your small business? Check out my past article for 12 Tax Deductions for the self-employed.
Okay so how do I itemize deductions?
You do so on Schedule A (Form 1040), Itemized Deductions. For more information on Schedule A, click this link to check out the resource on the IRS website.
We are in a new year so consider thinking about ways to invest or spend your money to increase your chances of itemizing your deductions on next year’s tax return. You can:
- Buy a house and deduct mortgage interest and property tax
- Give $$$ to your favorite charity. Just make sure the organization is a 501(c)(3) to ensure your donation is deductible.
- Make tax payments to your state. This can be from withholding state taxes with your employer or making quarterly estimated tax payments to your state.
Even if this year isn’t your year to itemize, keep these ideas in mind for when the time comes. You could be saving so much money by taking itemized deductions.
Disclaimer: This blog is for educational and conversational purposes only. Blog posts and social content from Obih Collective Inc. are not legal tax advice. Please consult a tax professional before making any tax decisions based on this information.
