Ah, the classic question: should I use the standard deduction or itemize on my taxes? With this year’s tax deadline just around the corner (April 17, 2018), you may have already been pondering this yourself.
The answer is “simple,” of course: You should use whichever deduction results in paying the least amount of taxes. While tax software can figure out the best approach, it’s still helpful to understand the difference between taking the standard deduction and itemizing. So, let’s take a look at both.
Read on to learn more about what you should do when filing your taxes for this year, and then keep reading to learn about the major changes that will happen once you file your 2018 taxes next year.
Factoid: According to the IRS, most taxpayers take the standard deduction rather than itemizing deductions (such as mortgage interest, charitable contributions, and state and local taxes).
Table of Contents:
The Standard Deduction
Every tax-paying income earner is entitled to what is called a standard deduction. The standard deduction is a flat dollar amount by which you can reduce your taxable income, thus reducing your tax liability.
The standard deduction varies depending on your filing status. On top of that, the amount generally rises every year based on inflation. For 2017 (what you should be filing right now), the standard deduction is as follows:
- $12,700 for married couples filing a joint return
- $6,350 for singles and married individuals filing separately
- $9,350 for heads of household
In addition, there is an additional standard deduction for blind people and senior citizens of $1,250 for married individuals or $1,550 for singles and heads of household.
To Itemize or Not To Itemize, That is the Question
To determine whether you should take the standard deduction described above or itemize, you’ll need to add up your itemized deductions. If your itemized deductions are more than the standard deduction, you itemize. If not, you stick with the standard deduction. Easy peasy lemon squeezy, as a friend of mine likes to say.
So, what expenses can you include if you itemize? Things that you may claim as itemized deductions include:
- Real estate and property taxes
- Interest you paid on a home mortgage or student loans
- Cash contributions to charities and churches
- State and local income taxes and/or state and local sales taxes
- Interest you paid on investments (such as margin interest)
- The fair market value of non-cash contributions to charities and churches
- Personal losses due to theft or injury
- Job-related expenses… as long as your employer did not reimburse you
- Union dues
- Any cost of purchasing or cleaning uniforms
- Job-related education and professional development
- Job-related travel
- Home office expenses
- Tax preparation fees
- Investment fees and expenses (this includes annual brokerage fees and IRA custodial fees)
- Safe deposit box fees
- Any necessary expenses related to self-employment income
Keep in mind that there are limits for some of these deductions. For example, you can deduct medical expenses only to the extent that they exceed 7.5% of your adjusted gross income.
If the total of your allowable itemized deductions is more than your allowable standard deduction, you have your answer and need to itemize your deductions on Schedule A. If it turns out that the standard deduction is more advantageous, take pleasure in the little victory of filling out a lot less paperwork.
One additional note for married individuals filing separately. Keep in mind that you must both select one type of deduction. That is, you must either both itemize or both take the standard deduction. You cannot mix and match between the two types of deductions.
Finally, for anyone who is confident that itemizing will be advantageous, remember to look into every deductible expense you can. Remember, every dollar deducted will save you between 15 and 35 cents depending on your tax bracket. If you can deduct $1,000 off your tax bill, that’s an extra $150 to $350 in your pocket!
But What About Next Year?
Unless you lived under a rock at the end of 2017, you’ve probably heard rumblings of the Republican tax bill. It was passed through Congress in mid-December, 2017. And it goes into effect soon. The bill will affect take-home pay through 2018, and it’ll affect your 2018 taxes. Which is where it comes into this discussion.
The tax bill significantly increases the standard deduction. In 2018, standard deductions will be as follows:
- $24,000 for married couples filing jointly
- $12,000 for single filers
The bill also gets rid of or limits some deductions that tax filers can still take on their 2017 taxes. This includes:
- Limiting the state and local tax deduction to $10,000
- Limiting the mortgage interest deduction to payments on $750,000 of mortgage debt
- Eliminating moving expense deduction
- Expanding medical expenses deduction
As of this writing on January 6, 2018, the IRS is still working up the final rules for the new tax law. But the bottom line is that even more filers will likely take the standard deduction now.
This is because A) it will be much harder to out-itemize the much higher standard deduction and B) some itemized expenses are now more limited, making this even more difficult.
But you’ll still go through the same process when you file your 2018 taxes next year. First you’ll want to total up your potential itemized deductions (hopefully using some good tax software). Then you’ll need to see if you can claim more in itemized deductions than you’ll get as a standard deduction.
The good news is that if you know already that you’ll get nowhere near the standard deduction, you don’t have to go through the work of totaling up itemized deductions. Just take that higher standard deduction and run with it!