In 2022, the standard deduction for US taxpayers is $12,950 for single, $19,400 for heads of household, and $25,900 for joint filers. The standard deduction is an important aspect of the US tax code that everyone should know. In this article we’ll discuss this concepts, as well as its benefits and risks.
This isn’t the only way to reduce your taxes, but it’s definitely the most popular one.
What is the Standard Deduction Anyway?
Many people know the term, and have even used the standard deduction without completely understanding it. In the simplest terms, the standard deduction is an amount set by the IRS that taxpayers can deduct from their income tax.
The vast majority of Americans use this deduction, 87.3% in 2018, as noted by the IRS. This number increased to 89% in 2019. This makes sense, because most people don’t have big expenses and want their taxes to stay as simple as possible. This chart below can help you quickly see whether most people at your income level take the standard deduction.
Congress introduced this deduction in 1944 because it simplified the process of collecting taxes. Instead of asking people to produce a year’s worth of receipts to prove their deductions, they could opt to take this tax break. Since then, many politicians have framed this deduction way to give taxpayers an easier, fairer way to pay their income tax.
For employees, and even many business owners, they don’t have significant expenses to offset their tax burden. Without a feature like the standard deduction, people investing in their business could effectively avoid paying taxes while also reaping the benefits of growth. Conversely, without the standard deduction, the IRS would effectively punish those didn’t or can’t invest.
This is not to say “the standard deduction makes taxes fair!” One thing that most people could probably agree on is the tax system being broken. This is just one aspect of where Congress and Presidents have taken actions over the years to bring greater equality to the tax code.
Know Your Deductions: Standard vs. Itemized
The difference between the standard deduction and itemized deductions is simple. Itemized deductions consist of all your qualified business expenses, medical bills, and other expenses you incurred that year. The standard deduction is a set number that’s not affected by how much you earned or spent.
How Do I Know Which I Should Take in 2022?
In short, do you and your business have more than $12,900 in qualified expenses? If not, go with the standard. Unfortunately, most people don’t know their total expenses, or even the categories they should be tracking. Talk to your accountant about whether to take the standard deduction for 2022 taxes.
Many business owners choose to give their accountant access to an account that gets used strictly for business. If something that qualifies as an deductible expense, but isn’t a business expense, they make a note of that. Having said that, good accountants will recognize familiar charges and will deduct accordingly. They also know the acceptable ratio of income to deductions that won’t raise any red flags at the IRS.
While many people focus on the cost, the biggest benefit of speaking with an accountant is the time savings. Because of their experience, they know the questions to ask and can determine whether or not going through your expenses and receipts is worth the time. If you’re the kind of person that likes to DIY with your payroll and taxes, grab a calculator and a notepad, it’s math time.
Individuals without accounting experience will have to go through all the categories of deductions and consider each. While completely possible, the process risks missing out on big deductions like student loan debt, an adult child’s healthcare premium (even if not a dependent!), or retirement savings. Forbes published a helpful list of common deductions that can give you an idea of where you stand. Finally, start calculating your business expenses and organizing them neatly.
Pros and Cons of Taking the Standard Deduction
Simplicity continues to be the biggest pro of taking the standard deduction. You fill out your earnings, and then subtract that pre-fixed amount. Easy! On the other hand, this could end up costing you more if you had a lot of expenses in 2022.
When it comes to employees, the standard deduction will reduce their tax bill the most. On the other hand, employers or business owners might benefit from itemizing their deductions, particularly self-employed or sole proprietors. For owners that get taxed as a pass-through business, this is particularly true in light of the qualified business deduction.
Many sole proprietors and LLCs without big business expenses choose the standard deduction. I am a perfect example of this category, because as a writer, I don’t need many tools and I don’t often hire contractors to perform services for my business. In the future, that could change if I choose to expand. Because of my knowledge about this topic, I know that the standard deduction for 2022 will save me money.
Is the Standard Deduction Always the Same?
No. The standard deduction has changed in form and amount many times over its history. In its first iteration, it was calculated as a percentage. In the 1960s, it switched to a fixed rate. Since then, the amount has increased, but irregularly. Check out the table provided by Tax Policy Center
Any Way You Deduct
Whether you take the standard deduction or itemize, use an accountant or DIY, it’s always worth saving time, money, and stress by learning the ropes or relying on professionals. If your income is higher or are a business owner, the more likely you are to itemize. If you don’t have many qualified expenses, you’re probably with the 89% of Americans that go standard.