Standard Deduction or Itemized Deductions
The standard deduction might work out to be greater in 2018
Everyone is entitled to claim a variety of tax deductions to help minimize what they’ll end up paying in taxes. Deductions reduce your taxable income, then income tax is computed on what remains according to your marginal tax rate based on your income and filing status. Deductions aren't the same as tax credits, which come directly off what you owe to the Internal Revenue Service.
The Internal Revenue Service gives you two options for deductions. You can take the standard deduction or you can itemize your deductions, whichever is more advantageous to you.
The Standard Deduction
The amount of the standard deduction you’re entitled to depends on your filing status. As of 2018, the deduction amounts are $12,000 for single taxpayers and married taxpayers filing separate returns, $24,000 if you're married and filing a joint return or a qualifying widow(er), and $18,000 for those who qualify as head of household.
If you and your spouse file separately, you must both take the standard deduction or you must both itemize.
Use page 32 of the worksheet in the Instructions for Form 1040 provided by the IRS to calculate your standard deduction if someone else can claim you as a dependent. The deduction for a dependent is the larger of $1,050 or your earned income plus $350 as of 2018. It cannot exceed the deduction of $12,000 for a single filer.
Special Rules for the Elderly and the Blind
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 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 allow you to convert otherwise taxable income into nontaxable income if you spend money on certain tax-privileged items. You can't claim both the standard deduction and itemize other deductions as well.
If you choose to itemize, tally up your various deductions item by item on Schedule A, then enter the total on your 1040 return. 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
- State and local income taxes or state and local sales taxes
- Real estate (property) taxes
- Personal property taxes, such as motor vehicle registration fees
- Interest paid on a home mortgage
- Interest paid on investments, such as margin interest
- Investment fees and expenses, such as IRA custodial fees and annual brokerage fees
- Contributions and donations made to charities and churches
- Gambling losses, but only to the extent of gambling winnings
You don't have to itemize to claim all available deductions. Some are "above the line" adjustments to income, including 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.
Limitations on Itemized Deductions
Some itemized deductions are limited to threshold amounts and other rules, and your overall total itemized deductions can be limited by your AGI.
- Health care expenses are only deductible to the extent that they exceed 7.5 percent of your AGI as of 2018. For example, if your AGI is $30,000, your threshold for medical expenses is $2,250. Only the amount of medical, dental and other health care expenses paid by you that exceed this number can be deducted.
- Charitable donations are generally limited to no more than 50 percent of your adjusted gross income. If you donate stocks, bonds, works of art, or other assets on which you would have paid capital gains tax, this drops to 30 percent. Excess charitable contributions can be carried over to future years' tax returns for up to five years, however.
Should You Itemize or Claim the Standard Deduction?
The IRS indicates that most taxpayers choose the standard deduction. All the work involved in itemizing might add up to only a handful of dollars saved over the standard deduction amount, if the total of your itemized deductions even exceeds the standard deduction at all.
Otherwise, however, you’ll save more in taxes if you invest the time and effort into itemizing. In the end, it comes down to your personal tax situation.
Changes in 2018
The debate between itemizing or claiming the standard deduction become more complicated—or perhaps simpler—in 2018 after the passage of the Tax Cuts and Jobs Act (TCJA). The TCJA eliminated some itemized deductions, including some that related to work-related expenses, and it restricted others.
For example, 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.
Likewise, the TCJA ramped up the standard deductions for each filing status to almost double what they were in 2017. The figures cited here are the 2018 standard deductions provided for under the TCJA.
The total of your itemized deductions would typically have to surpass these much higher standard deduction thresholds to make the time and effort involved in itemizing worth your while in 2018, and fewer itemized deductions are available. But check with a tax professional to make sure.
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.