Standard deduction
A fixed dollar amount, set by law and adjusted each year, that taxpayers can subtract from income instead of itemizing deductions.
What it means
The standard deduction reduces taxable income without requiring records of specific expenses. The amount depends on filing status, is adjusted for inflation each year, and is higher for people 65 or older or blind. Most taxpayers take it because it exceeds what they could itemize.
Taxpayers choose either the standard deduction or itemized deductions, whichever is larger, but not both. Some adjustments to income, such as deductible IRA contributions, are available either way because they reduce AGI before this choice is made.
Example
Suppose the standard deduction for someone’s filing status were a made-up $10,000 and their itemizable expenses totaled $12,000. Itemizing would deduct $2,000 more, saving $400 at a hypothetical 20% marginal rate. If their expenses were only $8,000, the standard deduction would be the better choice.
How it’s used
- Filing a simple return
- Deciding whether to itemize
- Estimating taxable income
Good to know
- Some people bunch deductible expenses, such as charitable gifts, into alternate years so they itemize one year and take the standard deduction the next.
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.