According to IRS (Internal Revenue Service), standard deduction is a portion of income that is not subject to tax and can be used to reduce a tax bill. This is one of the two methods that reduce your taxable income, the other method is called itemized deduction, which we might introduce it in another article.
Basically, the federal government and state government will tax all your income when you receive your wages. During April, when everyone need to file their W-2 form to report their income and tax, we could receive the tax return from the federal government. This tax return is based on the standard deduction.
For example, the standard deduction in 2019 is $12,200 for single filers and married filers filing separately, $24,400 for married filers filing jointly and $18,350 for heads of household. In other words, when you report your income and all your income is below this amount of money under certain category, your income is in fact not taxed, and you will receive all the federal withholding.
The standard deduction changes every year and this might depend on the inflation as well as the national GDP. For example, the standard deduction in 2020 is $12,400 for single filers and married filers filing separately, $24,800 for married filers filing jointly and $18,650 for heard of household. We could observe that this threshold increases around $300 to $400 for each category, which might infer an inflation or an increase of average wages.
When you request your tax return in April, you can either take the standard deduction or itemized deduction, but you cannot do both. If you choose a standard deduction, your taxable income will be your original income that are subtracted from standard deduction of the year. For example, if you are single and you earn $14,000 in tax year of 2020, your taxable income will be $1600, since the standard deduction in 2020 is $12,400.
The IRS usually lets you take the standard deduction on a no-questions0asked basis, since standard deduction is the easiest way of tax deduction. Overall, the standard deduction reduces the amount of income you have to pay taxes on, which is very friendly to low-income families.