The tax world can seem complex and daunting, with its myriad of rules and ever-changing landscape. However, there’s one element of taxation that’s simple yet significant – the standard deduction. In this article, we’ll take a deep dive into the standard deduction, its potential increase for the tax year starting in 2024, and what this could mean for you.
What is the standard deduction?
Imagine you’re baking a cake, and your recipe calls for 3 cups of sugar. But you find a hack that says you can reduce it to 2 cups without altering the taste. That’s what the standard deduction does to your taxable income—it’s a set dollar amount that decreases the income you’re taxed against, making it the tax world’s equivalent of that baking hack.
In 2023, the standard deduction was $27,700 for those with the filing status of married filing jointly, $20,800 for head of household, and $13,850 for single and married filing separately. Essentially, it means that if you’re a single filer earning $50,000 a year, after applying the standard deduction, you’re only taxed on $36,150 of your income.
The Simplicity and Benefits of the Standard Deduction
The beauty of the standard deduction lies in its simplicity. It’s like choosing a fixed-price menu at a restaurant. You don’t have to itemize the food or calculate the cost of individual items. It’s straightforward, and you know what you’re getting.
Choosing the standard deduction means you don’t have to itemize deductions like medical expenses or charitable donations. It also saves you the hassle of maintaining records and receipts of expenses in case of an audit.
When Does It Make Sense to Itemize?
There are circumstances where it’s more beneficial to itemize deductions instead of taking the standard deduction. Imagine you’re shopping for a new laptop. The store offers a flat $200 discount, or you can use various vouchers and deals that, when added up, could save you $300. In this case, you’d go for the vouchers, right? It’s the same with taxes. If your itemized deductions total more than the standard deduction, you’d want to itemize. This is often the case if you had large out-of-pocket medical expenses or if you own a business.
Potential Increase for the Tax Year 2024
Now, let’s talk about what’s brewing for the tax year 2024. The House Ways and Means Committee has proposed a series of bills, one of which suggests increasing the standard deduction. This increase would mean a $2,000 raise for single filers, $3,000 for head of household, and $4,000 for married individuals filing jointly.
Keep in mind, though, this is just a proposal at this stage. For these changes to take effect, the bills still have to pass the House and then the Senate.
Looking even further ahead, the proposal outlines that starting from tax years 2025, these amounts would be indexed by inflation. This means the standard deduction would increase each year with the rate of inflation, keeping your tax savings in line with the cost of living.
Staying up to date
The standard deduction can be a great tool for simplifying your tax return and potentially reducing your tax bill. However, tax rules often change, so it’s important to stay updated.
It’s also important to keep your CPA updated on any changes to your financial situation throughout the year. Avoid surprises at tax time by making sure your CPA is aware of income changes, major purchases, new businesses, and anything else that can impact your tax situation.