The IRS released annual inflation adjustments for 2020 for more than 60 tax provisions on Wednesday, including retirement contribution limits and income brackets. It also announced that the standard deduction will be increasing next year.
The standard deduction is a set dollar amount by which a person's income is reduced, before income tax is applied to the rest. Filers can opt to take the standard deduction, which is the same for everyone in the same filing status, or itemize their tax deductions each year. There are hundreds of possible itemized deductions, including the mortgage interest deduction, and you'd only want to itemize if the total deduction was larger than the standard deduction.
In recent years, some 70% of taxpayers took the standard deduction over itemizing, according to the Urban-Brookings Tax Policy Center, and more are likely to now that the 2017 Tax Cuts & Jobs Act, which essentially doubled the amount of the standard deduction from previous levels, is fully in effect.
Here are the standard deduction amounts for 2020:
- Married individuals filing jointly: $24,800
- Heads of households: $18,650
- Unmarried individuals: $12,400
- Married individuals filing separately: $12,400
If you don't know which filing status you fall under, you can use this tool from the IRS. There are a few situations in which filers are not eligible to take the standard deduction, including if you are married filing separately and your spouse itemizes.
Experts say the standard deduction makes more sense for most tax filers over itemizing deductions. This is especially true for young workers, who likely have low salaries and rent an apartment or house (there are many home owning-specific deductions that can be itemized).
Like this story? Subscribe to CNBC Make It on YouTube!