A standard deduction is a tax term that refers to the amount that the federal government allows taxpayers to deduct from their Adjusted Gross Income (AGI) to arrive at their taxable income. It was created to simplify tax returns and cut down on administrative work auditing people’s itemized deductions. It is based on filing status, as seen below:
2020 Standard Deduction by Filing Status
|Filing Status||Standard Deduction|
|Married Filing Jointly (MFJ)||$24,800|
|Married Filing Separately (MFS)||$12,400|
|Head of Household (HOH)||$18,650|
Real-life Application: Person A files as “Single” and they had AGI of $30,000 for 2020. Their taxable income for the year would be $17,600 ($30,000 – $12,400). They could refer to the tax brackets to see how much federal tax they will owe (or get refunded to them).