2020 IRS Standard Deductions and Exemptions
There are some changes to the standard IRS deductions and exemptions for 2021, with these being slightly higher than in 2020.
However, in a few cases, the deduction amounts for 2021 will remain the same as the previous year.
For example, state and local sales tax, medical and dental expenses, and percentage limits for charitable cash donations given to public charities.
On the plus side, standard deductions, income thresholds for tax brackets, and retirement savings limits have gone up.
We have all the numbers here and how the change will affect taxpayers.
What Are Tax Deductions?
Most taxpayers can choose between itemizing tax deductions and taking the standard deduction. Itemizing, which requires accurate record-keeping, allows you to take deductions for specific expenditures from the tax year.
The standard tax deduction is a fixed amount set by the IRS each year and is usually based on your filing status. Either way, your deductions reduce the amount of your taxable income. In other words, they lower the amount of overall taxes you owe.
In most cases, if you can show that you’ve had more deductible expenses than the amount of the default standard deduction, it’s better to itemize. This way, you reduce your taxable income and pay less in taxes.
However, if you don’t have enough itemized deductions, taking the standardized deduction works out best.
In 2019, it was estimated that only about 13.7% of U.S. households itemized their deductions. With a higher standard deduction, it will be more difficult for taxpayers to itemize enough to cross that threshold.
However, you may be missing out on certain deductions like mortgage interest.
IRS publication 501 outlines each year’s deduction amounts. There are some cases where you can make adjustments to the standard deduction. For example—if you are 65 or older or if you are blind—you get a higher standard deduction.
|Married filing jointly||$25,100||$24,800||$24,400||$24,000||$12,700||$12,600||$12,600||$12,400||$12,200||$11,900||$11,600||$11,400
|Married filing separately||$12,550||$12,400||$12,200||$12,000||$6,350||$6,300||$6,300||$6,200||$6,100||$5,950||$5,800||$5,700
|Head of household||$18,800||$18,650||$18,350||$18,000||$9,350||$9,300||$9,250||$9,100||$8,950||$8,700||$8,500||$8,400
- If you are age 65 or older or legally blind, your standard deduction increases by $1,700 if you file as single or head of household.
- If you are married filing jointly and you/or your spouse is 65 or older, your standard deduction increases by $1,350.
- If both you and your spouse are 65 or older, your standard deduction increases by $2,700. If one of you is legally blind it increases by $1,350. If both of you are legally blind, it increases by $2,700.
- If you are a qualifying widow(er), your standard deduction increases by $1,350 if you are 65 or older and/or legally blind.
What About Itemized Tax Deductions?
At the end of 2018, the Tax Cuts and Jobs Act eliminated quite a few itemized deductions. One example is that you can no longer deduct tax preparation fees or unreimbursed employee expenses. The idea was to simplify the tax code. While it has become a lot more straightforward compared to before, it wasn’t necessarily designed to give Americans a tax cut.
For most, here are some itemized deductions that you can still take advantage of:
- State and local taxes
- Mortgage interest
- Medical expenses
- Charitable contributions
Keep in mind that itemized deductions will have their own qualification criteria, rules, and restrictions. You’ll want to make sure to check if you’re able to deduct some or any at all.
To determine whether it’s better to take the standardized or itemized deduction, try estimating qualifying expenses from the categories mentioned above. If the amount is close to what this year’s standard deduction will be, then it could be worth it to do a more thorough calculation to get a better picture of the better choice.
What About Tax Credits?
Tax credits reduce your tax liability directly. In 2021, the maximum earned income credit (EIC) for qualifying taxpayers is $6,728 (for those who have at least three qualifying children). This tax credit starts to phase out if you earn over a certain qualifying amount.
Also, if you have a child under 17 by the end of the 2021 tax year, you will be able to qualify for the child tax credit. You may be able to claim up to $2,000 per qualifying child–there’s no upper limit.
For the lifetime learning credit, the amount is gradually reduced (phased out) if your MAGI is between $118,000 and $138,000 (if you file a joint return).
If you’re a head of household or a single filer, your MAGI starts at $59,000 and phases out at $69,000. Unfortunately, you won’t be able to claim this credit if you’re married but filing separately.
What Does it Mean for My Taxes?
Of course, the main question for most tax filers is, “How does this affect me?” Here are a few bottom-line takeaways to consider:
- You’re still more likely to take the standard deduction. The higher standard deduction alone will be enough to push many taxpayers into taking it rather than itemizing. But taxpayers who used to itemize due to hefty mortgage interest, lots of charitable contributions, or high state and local income and property taxes may find those more-limited deductions aren’t enough to push them over the threshold now.
- Taxes may be simpler in some ways but more complex in others. Taking the standard deduction is, indeed, simpler than itemizing. But it may take some time to hash out all the practical implications of the tax law. So be prepared for some complications along the way.
Again, each tax situation differs depending on different variables like your filing status. If you’re unsure, it’s best to consult a reputable tax professional as this person should be up to date on tax laws.
If you would like to learn more about how to navigate your taxes, check out the informative course offered by Cofield’s Concepts.