Tax deductions such as mortgage interest, state and local taxes, and charitable contributions get a lot of attention this time of year, but many taxpayers don’t have enough of these deductions to benefit them on their tax returns. Instead, these taxpayers benefit from the standard deduction, a fixed dollar amount that non-itemizers may subtract from their income before their tax rate is applied.
The Tax Cuts and Jobs Act of 2017 (TCJA) increased the standard deduction from $6,500 to $12,000 for single taxpayers and from $13,000 to $24,000 for taxpayers who are married filing jointly. As a result, the Joint Commission on Taxation estimates that the number of taxpayers who itemize will fall from 46.5 million in 2017 to just over 18 million in 2018, meaning about 88% of the 150 million households that file taxes will claim the standard deduction rather than itemize.
Will you be one of them? Here’s everything you need to know about choosing between the standard deduction and itemizing your tax deductions. For help with other issues, check out our complete tax guide.
What Is a Tax Deduction?
A tax deduction reduces the amount of your income that’s subject to your tax rate, thus lowering the total amount you owe to the federal government. There are three types of tax deductions.
1. Above-the-Line Deductions
You can claim “above-the-line” deductions, which are entered above your adjusted gross income (AGI) on Form 1040, regardless of whether you itemize or take the standard deduction. Examples of these include the deduction for contributions to a health savings account (HSA) or IRA, student loan interest, and self-employed health insurance.
You’ll report above-the-line deductions as “Adjustments to Income” on Schedule 1 attached to your Form 1040.
2. Itemized Deductions
Itemized deductions are only available to taxpayers who itemize on Schedule A attached to Form 1040.
If you own a home, live in a high-tax state, or make large charitable donations, itemizing your deductions on Schedule A may be more advantageous than taking the standard deduction. Though itemizing requires additional work, the extra effort will be worth it if it reduces your tax bill.
Common Expenses You Can Deduct on Schedule A
- Medical and Dental Expenses. If you paid for medical and dental expenses and weren’t reimbursed, you can deduct the amount that exceeds 7.5% of your AGI. For 2019 returns, that floor will increase to 10%. For a detailed list of what you can and cannot deduct, check out Publication 502.
- State and Local Taxes. You can deduct state and local real estate and personal property taxes, as well as either state and local income taxes or general sales taxes. Starting with 2018 returns, the TCJA limits the total state and local tax deduction to $10,000.
- Home Mortgage Interest and Points. You can deduct interest paid on the mortgage for your primary residence and one secondary or vacation home as long as your total mortgage acquisition debt does not exceed $750,000. You can also deduct points in the year they’re paid as long as you meet certain criteria. If you don’t meet those criteria, you may deduct the points over the life of your loan. Starting with 2018 returns, interest paid on home equity debt is no longer deductible unless proceeds of the loan were used to buy, build, or substantially improve your home.
- Charitable Gifts. You can deduct gifts of cash, goods, stocks, bonds, or other items to IRS-qualified charities. Be sure to confirm that the charity is IRS-qualified and retain documentation to support your deduction in case of an audit.
- Casualty and Theft Losses. If you took a financial hit to your home, vehicles, or household items due to theft, vandalism, or an act of nature, you might be able to deduct the loss. You can only deduct losses not reimbursed by insurance. Use Form 4684 to calculate your deduction.
- Other Itemized Deductions. The TCJA eliminated the deduction for miscellaneous itemized deductions subject to a 2% of AGI floor. That includes deductions for unreimbursed employee expenses, tax preparation fees, and investment expenses. Miscellaneous deductions not subject to a 2% of AGI floor remain; however, they are not applicable to many taxpayers. These include gambling losses up to the amount of any winnings, casualty and theft losses on income-producing property, amortizable premiums on taxable bonds, and unrecovered investments in a pension. For a complete list, see the Instructions for Schedule A.
3. Standard Deduction
The standard deduction is a set amount you’re allowed to take based on your filing status and age. The standard deduction makes filing taxes simpler because you don’t have to complete Schedule A or retain documentation to claim the standard deduction.
For 2018 returns, the standard deductions are as follows:
- $12,000 if single or married filing separately
- $18,000 if head of household
- $24,000 if married filing jointly
However, your standard deduction will be higher if you’re age 65 or older or blind. A single taxpayer who is over the age of 65 or blind receives an additional standard deduction of $1,600. A married couple filing jointly who are both over age 65 receive an additional standard deduction of $2,600. If you or your spouse can be claimed as a dependent by someone else, you’ll need to complete the “Standard Deduction Worksheet for Dependents” found on Page 35 of the Form 1040 Instructions.
Exceptions to Taking the Standard Deduction
You cannot take the standard deduction in these two circumstances:
- You are married, filing a separate return from your spouse, and your spouse itemizes deductions
- You were a non-resident alien or a dual-status alien during any part of the year (check out Publication 519, the U.S. Tax Guide for Aliens, for more specifics)
Standard Deduction vs. Itemized Deductions: How to Decide
Now that you know the difference between the standard deduction and itemized deductions, you need to choose which you’ll take since you can’t use both. The decision comes down to whether your total itemized deductions exceed the standard deduction for your filing status and age.
Before the TCJA, homeownership was a common deciding factor because mortgage interest and property taxes often pushed a household’s itemized deductions over the available standard deduction. However, with the standard deduction nearly doubling in 2018, owning a home may not matter as much. Either way, it pays to run the numbers to see whether itemizing or taking the standard deduction is more advantageous in your situation. If you use online tax preparation software, it usually handles this comparison for you.
Once you’ve determined which deduction to use, applying it is easy. On Line 8 of Form 1040, you’ll enter either the standard deduction or your total itemized deductions from Schedule A.
Tax Deduction Tips
Whether you take the standard deduction or itemize, there are some things you can do to simplify the process and ensure your tax return is accurate:
- If you’re married and file a return separately from your spouse, remember that both you and your spouse must use the same deduction method. If your spouse itemizes, you must itemize, and vice versa. Don’t try to sneak your return in hoping the IRS won’t notice; both returns will be rejected.
- If you choose to take the standard deduction, you can still take advantage of above-the-line deductions, as well as tax credits. Tax credits reduce the amount of tax you owe dollar for dollar, as opposed to the amount of income you’re taxed on, and are therefore more valuable.
- Keep in mind the range of expenses you can deduct throughout the year so you can take advantage of tax-saving opportunities as they arise. For example, while decluttering your home, you could decide it’s too tedious to have a garage sale for your unwanted items. If you opt to donate them to a qualified charity instead, get a receipt and claim the tax break.
- You can “front-load” expenses, such as by paying next year’s tuition this year or scheduling medical procedures before December 31st, to maximize your deductions. It makes sense to do this during high-income years. An accountant can help you plan when to make major purchases and sales to maximize tax benefits.
Tax Preparation Options
You have several options available when it comes to resources to help you decide whether to claim the standard deduction or itemize. Whether you take it on yourself or work with an expert depends on your comfort level with tax laws and tax preparation software.
Option #1: Do It Yourself
Online tax preparation software is a low-cost and useful option. It’s especially helpful if you use the same software year after year since many services such as TurboTax, H&R Block, and TaxAct retain your information and can carry forward information from the previous year.
If your AGI is $66,000 or less, you can file your federal return free of charge with a range of tax prep programs. The IRS maintains a list of Free File Software options on its website. The IRS also allows taxpayers to file online free of charge using fillable forms, regardless of your income. This option makes sense if you’re comfortable filling out all of the tax forms and schedules you need and don’t mind using separate tax software to file your state income tax return.
However, if you have a complicated tax situation — for instance, you own several rental properties or have a small business — you’re better off getting professional help so you don’t overlook any deductions.
Option #2: Use a Tax Preparer
Having a professional handle your taxes is a smart move if you have a complex tax situation or experienced life events that will bring big changes to your return, such as getting married, investing in a rental property, or moving out of state.
You can try one of the major tax preparation companies, such as H&R Block, Liberty Tax, and Jackson-Hewitt. An independent tax preparer may be less expensive and offer you more personalized service and attention.
Keep in mind that hiring a tax pro is often much more expensive than filing on your own. However, the expense might be worth it if it frees up hours you would have spent researching tax laws and filling out confusing forms. Plus, as long as you’re sure to hire a qualified tax professional, you can enjoy confidence and peace of mind knowing your return has been prepared accurately.
Recent tax reform made changes that impact virtually every taxpayer, and tax laws and limits change every year. Having a clear understanding of available tax deductions and planning accordingly can reduce your tax liability by hundreds or even thousands of dollars, depending on your tax bracket and the total deductions you claim.
Take the time to review the instructions for Form 1040 and Schedule A to familiarize yourself with the deductions you can claim. For help with other issues, check out our complete tax guide.
Do you usually itemize or take the standard deduction? Will the increased standard deduction change your decision this year?