I’ve always been a bit confused by the standard deduction when filing my taxes, but I’m extra confused this year. I bought a my first home in 2021 and was hoping for a nice tax return. I entered in my mortgage interest, property taxes, and points paid on the mortgage and it’s still under the standard deduction, so I get nothing. So what exactly is the standard deduction, and how is that number calculated, and why does buying a home not get me any sort of tax break?
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The general idea is that the government assumes that most people will have some deductible activity every year, and requiring everyone to list out every single detail to itemize deductions every year would just make tax time even more of a headache.
So instead the federal government gives most filers an allowed amount that filers can choose to accept without any documentation/reasons, but if they do, most types of individual deductions won’t be allowed. If one doesn’t anticipate itemizing for more than the standard deduction, this can save a lot of time when filing.
So the standard deduction is a general number that the IRS gives to reduce your taxable income. That number must be based off of some average or median income number. Maybe your income falls a little under where their magic number is for income and you’re already getting a bigger advantage by using the standard deduction.
The idea is that the tax code should be “progressive”; i.e. people with small incomes shouldn’t owe much in income tax, so they’re charged a low tax rate and get to deduct some expenses from their taxable income. Even if they don’t have those expenses, they can take the “standard deduction”, which is simpler to do, with no need for documentation. The standard deduction got a big bump in the tax reform enacted a few years ago.
You *can* itemize your deductions (mortgage interest, etc.) if you want, but if the standard deduction is bigger, you should file for that instead.
You’re not taxed on everything you make. The standard deduction is an amount (depending on whether you file single, married filing joint, etc.) that will be subtracted from your income. Your tax is figured on what’s left over.
You have the option to deduct certain other things instead, like mortgage interest, charity donations, etc. Generally, you want to deduct the higher of the two.
It sounds like your standard deduction is higher than your itemized deductions, so the software is still using that.
https://www.irs.gov/pub/irs-pdf/f1040.pdf
https://www.irs.gov/pub/irs-pdf/f1040sa.pdf
Before trump changed the tax laws (no judgement here – just fact) your mortgage interest and taxes almost always granted a bigger deduction than the standard (it did for me). After the tax changes that went into effect for tax year 2020 I believe, there were two changes.
1 – the standard deduction was raised significantly.
2 – there is a cap on the amount you can deduct for mortgage interest and property taxes.
For >15 years I itemized for the bigger deduction. With the changes, my itemized deduction is just below the standard – so I take the standard deduction now.
In some ways this levels the playing field for non-homeowners. And for what it’s worth, I’m paying less in net taxes after the change than when I was itemizing – so it’s not like anything was taken away from me.
A lot of these comments have correctly indicated that the standard deduction is designed to be a default deduction to conditionally supplant itemized deductions in a simplistic way. Some important context is that post-TCJA in 2017, the number of itemized 1040 filers dropped from double digits to below 10%. There is a lot of complexity to IRS review and scrutiny of itemized deductions that can be sidestepped in an effort to minimize compliance review and enforcement cost internally at the IRS, which can be achieved through simply raising the standard deduction so more taxpayers are taking the standard deduction (requiring no substantiation) and therefore, not itemizing. It’s an interesting subject but certainly one effect is the saved cost for IRS review and enforcement.
Some taxpayers continue to itemize regardless. Those with tremendous medical expenses are one such category, also those making large charitable contributions (since the 30 50 60 100% etc AGI caps on charitable deductions are still well above the standard deduction amount for a taxpayer with a sizable adjusted gross income anyway).
The minute the legislature eliminates or raises the SALT cap, we will see a return to itemized deduction filings. Nearly every client I have worked with in the last few years has been subject to partial disallowance under the 10k SALT cap.
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