Standard Deduction or Itemized Deductions? Which Is Best?

The standard deduction might work out to be greater beginning in 2018

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Think of tax deductions as little—and sometimes not so little—gifts from the Internal Revenue Service. Their value is subtracted from your taxable income, then your tax is calculated on what's left. Look at it this way: 22% of $80,000 is significantly more than 22% of $65,000. You want to pay that 22% tax rate on $65,000.

The IRS gives you a few options for deductions. You claim the standard deduction for your filing status, or you can itemize your deductions, but you can't do both. Then there are "above the line" deductions, and you can take these in addition to the standard or itemized deductions.

The Standard Deduction

The amount of the standard deduction you’re entitled to depends on your filing status. As of 2019, the deduction amounts are $12,200 for single taxpayers and married taxpayers who file separate returns, $24,400 if you're married and filing a joint return or a qualifying widow(er), and $18,350 for those who qualify as head of household.

These figures are up somewhat from those in effect for the 2018 tax year (the tax return you'll file in 2019) because standard deductions are indexed for inflation. They creep up incrementally year by year to keep pace with the economy. Standard deductions were $12,000 for single taxpayers and married taxpayers filing separate returns in 2018, $24,000 for married taxpayers filing jointly and qualifying widow(er)s, and $18,000 for heads of household.

Special Rules for Dependents, the Elderly, and the Blind

These numbers don't apply if someone else can claim you as a dependent. In this case, your standard deduction is the larger of $1,050 or your earned income plus $350 in the 2018 tax year. It cannot exceed the 2018 standard deduction of $12,000 for a single filer.

You can refer to page 34 in the Instructions for Form 1040 that's provided by the IRS to calculate your standard deduction if someone else can claim you as a dependent. 

People over age 65 and those who are legally blind are entitled to a standard deduction calculated by adding an additional amount to the deduction for their filing status. These additional amounts for tax year 2018 are:

  • $1,600 if you’re filing as single or head of household
  • $1,300 if you’re married and either you or your spouse are blind or over age 65
  • $2,600 if you're married and both you and your spouse are either blind or over age 65

Itemized Deductions

Itemized deductions allow you to convert otherwise taxable income into nontaxable income if you spend money on certain tax-privileged items. If you choose to itemize, tally up your various deductions item by item on Schedule A, then enter the total on your 1040 return and file Schedule A with your tax return.

Some of the more common itemized deductions available in 2018 include:

  • Medical, dental, prescription drugs, and other health care costs, including some insurance premiums, that exceed 7.5% of your adjusted gross income (AGI) in 2018. This increases to 10% on Jan. 1, 2019.
  • State and local income taxes or sales taxes, real estate (property) taxes, or personal property taxes, up to $10,000 beginning in 2018. This cap drops to $5,000 for married taxpayers who file separate returns.
  • Interest paid on home mortgages of up to $750,000, excluding home equity loans that are not used to "buy, build, or improve" the property. This deduction, too, is reduced for married taxpayers filing separate returns. Married separate filers are limited to $375,000 in indebtedness. These numbers are down form what they were in 2017, and the rule about home equity loans is new for the 2018 tax year as well.

Another Change in 2018

The debate between itemizing or claiming the standard deduction became more complicated after the passage of the Tax Cuts and Jobs Act (TCJA) in December 2017. The TCJA eliminated some itemized deductions, including those that related to work-related expenses, and it restricted others, as mentioned above.

A casualty and theft itemized deduction existed through tax year 2017, but you can no longer claim a deduction for theft losses, and casualty losses are limited to those that occur within a federally-declared national disaster area. That flood that wiped out all your new furniture might not qualify any longer unless the president declared that the event was a national disaster.

"Above-the-Line" Adjustments to Income

"Above the line" adjustments to income include a portion of any self-employment tax you might pay, contributions to certain qualified retirement plans, and student loan interest. These are subtracted from your income right off the bat to determine your adjusted gross income (AGI). You can claim them as well as the standard deduction or the total of your itemized deductions, which then come off your AGI.

So Should You Itemize or Claim the Standard Deduction?

The IRS indicates that most taxpayers choose the standard deduction. Your total itemized deductions in all categories might add up to only a handful of extra dollars over the standard deduction amount for your filing status, if it exceeds the standard deduction amount at all. But you’ll save more in taxes if you invest the time and effort into itemizing if that's not the case.

In the end, it comes down to your personal tax situation and which option shaves more money off your taxable income.

And here's a caveat: If you and your spouse file separate returns, you must both take the standard deduction or you must both itemize. Your returns have to "match" in this respect.

NOTE: Tax laws change periodically, and you should consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and is not a substitute for tax advice.