Should I Itemize or Take the Standard Deduction?

With the new tax reform signed into law this past December, many people are asking themselves if they should itemize or take the standard deduction. Good news! Although tax reform was passed this past year, the new law primarily affects 2018 taxes (file in 2019). The short answer is: if you had no major changes in 2017 that affected your taxes, you will more than likely take the same deduction you did in 2016.

What is the Standard Deduction?

The standard deduction is an amount preset by law that qualified taxpayers can deduct from their taxable income. If you do not itemize your deductions, most people qualify to take the standard deduction. The main exceptions are nonresident aliens or spouses who are filing separate returns. If filing separate returns and one spouse itemizes, the other spouse is not eligible for the standard deduction and should itemize as well. The standard deduction for 2017, the taxes you are filing now, is $12,700 for married filing jointly / qualifying widow(er), $9,350 for heads of household, and $6,350 for single or married filing separately.

What is the Itemized Deduction?

Some filers lower their tax bill by itemizing their deductions on Schedule A instead of taking the standard deduction. This saves some taxpayers money because their itemized deduction is higher than what they would be allowed to take as a standard deduction. Taxpayers can itemize deductions such as: home mortgage interest, real estate and property taxes, state and local income taxes or sales taxes, and charitable donations among others.

To determine the deduction that is the best for you, the IRS recommends figuring out your taxes using both the standard and itemized deductions. Choose to file using the deduction that saves you the most money.

Standard Deduction and the New Tax Reform

The new tax law did not increase the standard deduction for 2017. However, the tax law did almost double the standard deduction for 2018. Starting this year (taxes you will file in 2019), the standard deduction increases to $24,000 for married filing jointly / qualifying widow(er), $18,000 for heads of household, and $12,000 for single or married filing separately.

Most taxpayers take the standard deduction now. IRS expects millions more to stop itemizing and take the standard deduction beginning next year. For example, if you are married filing jointly and itemize your deductions for a total amount of $17,500, it is better for 2017 to take the itemized deduction. However, if the same scenario applies next year, it would be better to take the standard deduction of $24,000, because you would qualify for an additional $6,500 ($24,000-$17,500) deduction by not itemizing.

Before you start planning how you are going to spend all the extra money you expect to receive next year, keep in mind the personal exemption (currently $4,050 for 2017) has been eliminated. For families that qualify, the child tax credit has been doubled to $2,000 (from $1,000) to help offset the personal exemption elimination. For most, the elimination of the personal exemption in 2018 will lessen the net tax benefit, offsetting the extra money you would have received from the larger standard deduction. Think of the new laws regarding increasing the standard deduction as simplifying the way you will complete your taxes. For many of you, this will mean you no longer need to keep the box filled with receipts. However, it will not be a huge tax break for most.

Using the same example from above, this year the married couple with $17,500 in itemized deductions will receive a total deduction of $25,600 ($17,500 itemized deduction + $4,050 personal exemption for the first spouse + $4,050 personal exemption for the second spouse). For 2018 taxes with the standard deduction increased to $24,000 and the personal exemption removed, their deduction would be $24,000 — which is $1,600 ($25,600 - $24,000) less. However, they will not need to sort through that box of receipts because now they qualify for the higher standard deduction.

Itemized Deductions and the New Tax Reform

The new tax law has a minimal effect on itemizing deductions for 2017. The areas mainly affected in 2017 are the deductions for medical expenses, personal casualty losses, and business property. The tax reform law reached back to 2017 to lower the floor of qualifying medical expenses to exceeding 7.5% of your adjusted gross income, down from 10%. Personal casualty losses were extended to include losses in federally declared disaster areas. The new tax reform law makes this retroactive back to 2016. Also, the tax reform makes it possible for taxpayers to claim the personal casualty loss without itemizing, while still taking the standard deduction, with limitations. Finally, the deduction for certain business property acquired (including items purchased used) and placed into service after September 27, 2017 has been increased up to 100% of the cost(s).

For 2018 taxes (filed in 2019), the major change affecting itemizing deductions is the $10,000 cap on deductible sales taxes, state and local taxes, and/or property taxes. With this cap in place and the standard deduction almost doubling, it will make sense for many more taxpayers to simplify their tax filing process by choosing the standard deduction.

Still Not Sure if You Should Itemize or Take the Standard Deduction?

If you are close to the standard deduction threshold for your filing status, it will be better for you to run your numbers using both the standard deduction and itemized deduction to determine if you should itemize or take the standard deduction. For additional information on exemptions, standard and itemized deductions, and detailed filing information, refer to IRS Publication 501 (2017), Exemptions, Standard Deduction, and Filing Information. Choose the deduction that gives you the biggest tax break. For people who are not close to the standard deduction threshold for their filing status, they will receive a larger deduction in 2018 (file in 2019) by taking the increased standard deduction. Since the personal exemption is eliminated, the net tax benefit of the increased standard deduction will not be significant for most taxpayers.

Every person’s tax situation is different. With the accounting and tax preparation professionals at Gudorf Tax Group our professionals ensure you receive the best deductions for your individual tax situation and will help prepare you for the new tax reform changes that affect your 2018 taxes.