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.
Definitions and explanations
Itemized deductions involve availing of specific list of deductible expenses as laid out by the prevailing tax law. These 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 are available to those filers who choose not to avail of standard deductions 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 deductions require 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 deductions provide for a fixed amount of deductions which are standardized based on the filing status and age of the tax filer. These deductions are reduced from the individual’s income to arrive at taxable income. Tax is subsequently charged on this taxable income figure.
Standard deductions are available to filers who do not choose to avail itemized deductions.
The purpose of a standard deduction is to provide individuals tax relief from a certain proportion of their income.
In the USA, standard deductions are currently available between $12,000 and $24,000 depending on the individual’s filing status.
Standard deductions are available irrespective of incurring of expenses. It thus does not require maintenance or submission of any bills or receipts as proof.
Difference between itemized deductions and standard deductions:
The key points of difference between itemized deduction and standard deduction have been detailed below:
- Itemized deductions involve deduction of certain eligible expenses of income to arrive at taxable income.
- Standardized deductions are fixed amounts of monetary deduction determined 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 deductions do not require any tracking of expenses incurred during the year as these are 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 deductions 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 deductions are 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 deductions are 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 are available irrespective of expenses incurred and thus does not involve much tax planning.
Itemized deduction vs Standard deduction – tabular comparison
A tabular comparison of itemized deduction and standard deduction is given below:
|Eligible expenses allowed from income to compute taxable income||Fixed amounts of deduction as per filing status and age of individual|
|Tracking of expenses|
|To be maintained and 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|
Conclusion – itemized deductions vs standard deductions
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.