Definitions and meanings
While computing the personal taxable income of an individual, tax law provides for certain deductions. These are deductions that can be reduced from the individual’s income to arrive at the income subject to tax i.e., taxable income.
These deductions can take two forms- Itemized deduction or Standard deduction.
Itemized deduction involves availing of specific list of deductible expenses as laid out by the prevailing tax law. These itemized deductions are reduced from the individual’s income to arrive at their taxable income. The overall reduction in taxable income results in a lower income tax payable.
Itemized deduction is available to those filers who choose not to avail of standard deduction from their income.
There are a plethora of expense items that are eligible for itemized deduction. These can include deductions such as mortgage interest, property taxes, medical expenses, charitable contributions, gambling losses etc. Each of these expense deductions are subject to certain limits which are laid down by the tax law. The limits may be in absolute terms or limited to a percentage of the individual’s income.
The deductible expenses available for itemized deduction generally change from year to year.
Itemized deduction requires an individual to list down and track his deductible expenses. The individual is also required to keep a record of bills and receipts as proof of these expenses which may need to be submitted if faced with a scrutiny from tax authorities.
Standard deduction provides for a fixed amount of deduction which is standardized based on the filing status and age of the tax filer. This standard deduction is reduced from the individual’s income to arrive at taxable income. Tax is subsequently charged on this taxable income figure.
Standard deduction is available to filers who do not choose to avail itemized deduction.
The purpose of standard deduction is to provide individuals tax relief from a certain proportion of their income.
In the USA, standard deduction is currently available between USD 12,000 and USD 24,000 depending on the individual’s filing status.
Standard deduction is available irrespective of incurring of expenses. It thus does not require maintenance or submission of any bills or receipts as proof.
Key differences between Itemized deduction and Standard deduction:
The key points of difference between itemized deduction and standard deduction have been detailed below:
Itemized deduction involves deduction of certain eligible expenses of income to arrive at taxable income.
Standardized deduction is a fixed amount of monetary deduction based on filing status and age of individual that is reduced from their income to arrive at taxable income.
Itemized deductions require maintenance of list of deductible expenses incurred throughout the year. The eligibility of these expenses must then be checked with the deduction rules laid down by the jurisdictional tax law.
Standard deduction does not require any tracking of expenses incurred during the year as it is available irrespective of expenses been incurred or not.
3. Expense proofs
Itemized deductions require collection of bills and receipts in support of the expenses to be claimed. These proofs may also be required to be submitted if asked for by tax authorities.
Standardized deductions are available on the basis of filing status and age of tax filer and do not require collection or submission of any expense proofs.
4. Time involved in applying
Claiming itemized deductions is time consuming as it involves tracking of deductible expenses incurred throughout the year. It also requires investing more time while filing the tax return as the individual is required to fill several tax forms and expense schedules to claim itemized deduction.
Claiming of standard deduction is simpler and does not require much time and effort.
Itemized deductions are subject to limits prescribed by tax law. These may be limited to absolute amounts or a percentage of the individual’s income.
Standard deduction is subject to a fixed amount as determined by reference to individual’s filing status and age.
6. Number of deductions
Itemized deductions involve a number of different deductions of different amounts.
Standard deduction is limited to a single amount deduction.
7. Scope for tax planning
Claiming itemized deductions lends itself to tax planning as you can plan the timing and quantum of your expenses based on when it is more beneficial for you to claim them as deductions.
Standard deductions is available irrespective of expenses incurred and thus does not involve much tax planning.
Itemized deduction versus Standard deduction – tabular comparison
A tabular comparison of Itemized deduction and Standard deduction is given below:
|Deduction of eligible expenses from income to arrive at taxable income||Deduction of fixed amount based on filing status and age of individual|
|Tracking of expenses|
|To be maintained. To be submitted if called for by tax authorities.||Not required to be maintained|
|Time involved in applying|
|Each expense subject to a limit – either absolute number or a percentage of individual’s income||Absolute amount based on filing status and age of individual tax filer|
|Number of deductions|
|Scope for tax planning|
Itemized deductions and standard deductions are both options available to individual tax filers to reduce their taxable income and consequently their tax payable. Individuals can track and list down all deductible expenses and compare the resultant amount with the amount of standard deduction available. Individuals can then proceed to choose the form of deduction based on which is more beneficial to them. This exercise can be done each year and the choice of deduction available can also be made each year.