In the United States, there’s a silver lining when it comes to paying federal tax. All taxpayers get to set aside a portion of their income before tax is due. This “standard deduction” ensures that all U.S. taxpayers have at least some income that they don’t have to pay federal taxes on.
Say you’re a single taxpayer who makes $65,000 per year. If you take the $12,000 standard deduction for single taxpayers on your 2018 federal income tax return, you can subtract $12,000 from the amount you owe income tax on. This would mean you only owe federal income tax on $53,000 of your income. You get to keep that $12,000 “standard deduction” tax-free.
What is the standard deduction for 2018?
Your standard deduction amount depends on how you file your taxes. If you’re the head of a household, for example, your standard deduction will be higher than a single person.
The current U.S. standard deduction amounts are:
- $12,000 for single taxpayers
- $12,000 for married taxpayers who file their taxes separately
- $18,000 for heads of households
- $24,000 for married taxpayers who file jointly
- $24,000 for qualifying widows or widowers
If you are blind or over 65, you might also qualify to take a higher standard deduction.
The Tax Cuts and Jobs Act (TCJA) nearly doubled the standard deduction for 2018 from it’s 2017 levels.
Should you take the standard deduction or itemize your deductions?
Tax deductions are anything that allows you to pay less in taxes, so you want to take all the deductions you possibly can.
You have two options when it comes to minimizing your tax bill: take the standard deduction or itemize your deductions. Itemizing your deductions just means that the amount of income tax deductions you are allowed to take exceeds the standard deduction.
While about 70% of taxpayers take the standard deduction, it might be in your interest to choose the second option and itemize your deductions. As a business owner, you can take deductions around your home office, your miles travelled for business, office supplies, and other business expenses. These deductions can add up to more than the standard deduction. Depending on your business expenses for the year, you could actually save less on your tax bill if you opt to just take the standard deduction.
Example: Say you’re filing your income tax as a single taxpayer and trying to decide between taking the $12,000 standard deduction or itemizing your deductions. You add up all of your small business’s tax deductions and find that you have $12,500 worth of deductions—$500 more than the standard deductions, so you’ll want to take the itemized deduction. In this case, it would probably be wise to itemize your deductions when filing taxes, because you’ll get to keep an extra $500 tax free.
Further reading: The Big List of Small Business Tax Deductions (and How to Claim Them).
Keep in mind that the standard deduction for a single taxpayer nearly doubled from $6,350 in 2017 to $12,000 in 2018. Even if you have lots of itemized deductions, you may still find that the standard deduction is larger and gives you a bigger tax savings. Figure out (or ask your bookkeeper) the amount in tax deductions you have for the year. If your itemized deductions are higher than the standard deduction, itemize. If your itemized deductions are below the standard deduction, just take the standard deduction.
If you are still unsure whether to take the standard deduction or itemize, most tax software will provide questionnaires to help you decide.
How to claim the standard deduction
You take the standard deduction when filling out your federal income tax Form 1040. (Form 1040 is the basic tax form that every taxpayer is required to file.) On Line 8, you’ll choose whether to take the standard deduction or itemize your deductions.
Later in Form 1040, you will subtract the standard deduction from your total income, and this is how you claim your tax savings.