Deciding Between Itemized and Standard Tax Deductions
Itemizing Your Deductions Could Lead to Big Savings
Doing your federal income taxes is never any fun, and no one would blame you if you wanted to make the process as simple as possible. But choosing the path of least resistance — taking the standard tax deduction instead of itemizing — could cost you real money.
Yes, taking the standard deduction is certainly easier, and it might actually be a better option if you have a simple tax situation or you don’t own a home. But before you make the decision, you should crunch some numbers. If you determine that itemizing is right for you, it could lead to substantial savings.
Itemizing vs. Standard Deduction
The standard deduction is exactly what it sounds like — a flat amount that you can deduct from your taxable income. The amount you can deduct is based on your filing status, number of dependents, and what year you’re filing the taxes for.
For the 2017 tax year, the standard deduction is valued at $6,350 for single taxpayers and married couples filing jointly. It increases to $12,700 for married couples filing a joint return. Heads of household can claim a standard deduction worth $9,350. Beginning in 2018, the standard deduction increases to $12,000 for single filers, $18,000 for heads of household and $24,000 for married couples filing jointly.
When you itemize deductions instead, you have the ability to deduct the actual dollar amount of many different expenses. Some of these deductions come in the form of mortgage interest, property taxes, medical expenses and student loan interest, to name a few. If you totaled up all of your allowed deductions and the total you got was greater than the standard deduction, it would probably be wise to itemize.
What Expenses Can be Itemized?
Numerous expenses can be included on your list of itemized deductions. The most common expenses include:
- Mortgage interest
- Charitable contributions
- Property taxes
- State and local income taxes
- Gambling losses
- Student loan interest
- Moving expenses
- Job searching expenses
- Medical expenses that exceed 7.5% of your adjusted gross income
- Various miscellaneous expenses that exceed 2% of your income, such as: union dues, tools and supplies needed for work, tax preparation fees, and certain legal fees (there are many more)
Beginning in 2018, the ability to deduct some of these expenses and the amount that's deductible will change under the Tax Cuts and Jobs Act. For example, the deduction for mortgage interest decreases from $1 million to $750,000, while the deduction for charitable donations increases from 50% of adjusted gross income to 60%.
The deduction for state and local taxes will be capped at $10,000 going forward. Deductions for things like moving expenses, job hunting expenses and unreimbursed employee expenses will be eliminated, as will the deduction for alimony payments, tax preparation fees and home office expenses. Home equity loan interest will become nondeductible, along with deductions for casualty losses not covered by insurance.
Should You Itemize?
There is no right or wrong answer, and it ultimately depends on your situation.
To determine if itemizing would be worthwhile for you, take a look at Schedule A of IRS Form 1040. On this sheet, you can list your itemized expenses, and then total them up to compare the amount to the standard deduction. If the itemized amount is greater, then you would want to itemize. If the total itemized amount is less than the standard deduction, you would not want to itemize.
The largest deductions for most people come in the form of mortgage interest and property taxes, and in these situations, even a modest mortgage could put you over the standard deduction limit. Since this can total into the thousands of dollars over the standard deduction, the tax savings can be significant.
While this can be a big deduction, keep in mind that just because you own a home, it doesn't necessarily mean the mortgage tax deduction is better than the standard deduction. You still have to crunch the numbers.
Your filing status can also influence whether it makes more sense to itemize or take the standard deduction. If you're married, you and your spouse both have to choose the same option, even if you file separate returns. If one of you has significantly higher deductible expenses than the other and they also have a higher income, then itemizing would likely be the better option.
Also remember that for some expenses, you have to itemize on Schedule A to claim the deduction. That includes things like mortgage interest and charitable deductions. Other expenses can qualify for an above the line deduction, meaning you don't need to itemize to claim them. Those include student loan interest and contributions to a traditional IRA. Looking at both sides of the standard versus itemized coin and considering which above the line deductions you're eligible for can help you decide which path to pursue when preparing your return.