To decide whether to itemize your deductions or take the standard deduction, do this: figure out what itemized deductions you can take and add them up. If the total is more than the standard deduction for your filing status, then itemize your deductions.
American tax filers — whether individuals, married filing jointly or separately — face a choice when preparing their federal income tax returns. After computing their adjusted gross income (AGI), taxpayers can itemize their deductions (from a list of allowable items) and subtract those itemized deductions, and any applicable personal exemption deductions, from their AGI to arrive at their taxable income amount.
Alternatively, they can elect to subtract the standard deduction for their filing status (and any applicable personal exemption deduction) to arrive at their taxable income. In other words, the taxpayer may generally deduct the total itemized deduction amount, or the standard deduction amount, whichever is greater.
Standard deduction is a specific dollar amount that you can deduct from your income to reduce your taxable income. The amount of standard deduction depends only on your filing status and is increased every year to adjust for inflation. You are eligible for standard deduction if you have not itemized your deductions and you are either a US citizen, a resident alien (married or single), or a head of a household. Non-resident aliens are not eligible for standard deduction. You may be eligible for higher standard deduction amounts if you meet certain special criteria e.g. you are blind or over 65 years of age.
Standard Deduction Amounts
The applicable standard deduction amounts for tax year 2017, for which the return must by filed by Apr 15, 2018, are as follows:
|Filing status||Standard Deduction Amount|
|Married Filing Jointly||$12,700|
|Married Filing Separately||$6,350|
|Head of household||$9,350|
|Additional Amount if Blind||$1,250 (for married filing joint, married filing separately, or qualifying widow); $1,550 (for single and head of household)|
|Additional Amount if age 65 or older||$1,250 (for married filing joint, married filing separately, or qualifying widow); $1,550 (for single and head of household).|
The standard deduction amounts for tax year 2018, for which the return must by filed by April 15 2019, are as follows:
|Filing status||Standard Deduction Amount|
|Married Filing Jointly||$24,000|
|Married Filing Separately||$12,000|
|Head of household||$18,000|
Itemized deductions, on the other hand, are expenses which one can list if these expenses belong to a predetermined list of allowable items. The allowable items include payments to doctors, medical insurance premiums, cost of medical equipment and many more. There are differences between the two, and understanding them is imperative in deciding the exact amount of taxable income to be declared.
Expenses that can be itemized
Itemizing deductions would generally be more advantageous if the sum of all itemizable expenses works out to be greater than the standard deduction for the corresponding filing status. The following set of expenses can, in general, be itemized:
- Interest payments to service a mortgage on primary residence
- State and local property taxes
- State and local income taxes or, if living in a state that does not levy income tax, state and local sales tax.
- Charitable contributions
- Casualty & theft losses
- Gambling losses (to the extent that they exceed the gains from gambling)
- Medical expenses to the extent that they are greater than 7.5% of Adjusted Gross Income (AGI)
Standard or Itemized? How to Choose
You can choose to itemize your deductions or take the standard deduction — but not both. Making the right choice will save you money. The choice between the standard deduction and itemizing involves a number of factors:
- Standard Deduction is not available to nonresident aliens.
- A comparison between the available standard deduction and allowable itemized deductions — the larger amount is generally advantageous. This is how most people decide which type of deduction to take.
- Whether or not the taxpayer has or is willing to maintain the records required to substantiate the itemized deductions
- If the total itemized deductions and the standard deduction are very close in value, whether the taxpayer would prefer to take the standard deduction to reduce the risk of change upon examination by the Internal Revenue Service (IRS). (The standard deduction amount cannot be changed upon audit unless the taxpayer's filing status changes.)
- Whether the taxpayer is otherwise eligible to file a shorter tax form (like the 1040EZ or 1040A) and would prefer not to prepare (or pay to have prepared) the more complicated 1040 form and the associated Schedule A for itemized deductions.
- If the taxpayer is filing as "Married, Filing Separately", and his or her spouse itemizes, then the taxpayer must itemize as well.
Impact of the Tax Cuts and Jobs Act of 2017
In December 2017, president Trump signed into law a tax reform bill called the Tax Cuts and Jobs Act of 2017. This bill made had several provisions that affect your choice on whether to itemize or take the standard deduction.
First, the standard deduction was raised to $24,000 for a married couple and $12,000 for single filers. This is almost double of what it was before. So for a lot of taxpayers, it will be more advantageous to take the standard deduction because the total of all their itemized deductions will not exceed that threshold.
List of Eliminated Deductions
The tax reform bill of 2017 not only increased the standard deduction, it also eliminated or restricted certain itemized deductions i.e., these expenses used to be deductible if you itemized earlier (pre-2018), but starting with tax year 2018 they are either no longer deductible or have limitations:
- Alimony payments: For divorces finalized after Dec 31, 2018, the tax obligation for alimony shifts from recipient to payer. Earlier the payer could deduct alimony payments under their itemized deductions and the recipient owed income tax on alimony received. Now the money will be tax-free for the recipient but the payer will not be able to deduct this expense.
- Moving expenses: You can no longer deduct employment-related moving expenses, except if the moves were related to active-duty military service.
- Home equity loan interest: You can no longer deduct interest on a home equity loan, unless two conditions are met:
- you used the loan to buy, build, or significantly improve your home, and
- the loan is secured by your home.
- Miscellaneous deductions: Before the tax reform bill, certain expenses were deductible but subject to a 2% rule i.e., they were deductible to the extent that the total of these miscellaneous expenses exceeded 2% of AGI. These are no longer deductible. Examples are union dues, unreimbursed employee business expenses, tax prep expenses, investment management fees, safe deposit box rental.
- Casualty and theft losses: These are no longer deductible unless the loss occurs due to a natural disaster in a federally-declared disaster area.
List of Restricted Deductions
- State and local taxes (aka the SALT deduction): Deductible state and local taxes include property taxes, plus either the sales taxes or the state income tax. Going forward, only up to $10,000 (or $5,000 if single) of state and local taxes are deductible.
- Medical expenses can be deducted to the extent that they exceed 7.5% of AGI. Before the tax reform bill, the limit was 10%, which was instituted as part of the Affordable Care Act (aka Obamacare).
- Mortgage interest deduction for newly purchased homes (and second homes) are now limited to a loan balance of $750,000. This limit was $1 million previously. For those who use the married filing separate status, the home acquisition debt limit is $375,000.
Standard deductions can be applied only if one is eligible for it. For example, non-resident aliens are not eligible for standard deductions. Added benefits are given for the visually challenged and senior citizens (over 65 years old) in standard deductions, whereas there are no such provisions in itemized deductions.
Itemized deductions impose some restrictions. If you are married and are filing your returns separately, both spouses must make the same choice i.e. you are required to itemize your deductions if your spouse does so. Tax filers are required to maintain records and evidence supporting their itemized deductions. No such substantiation is required for standard deductions.
Since the standard deduction is based on the filing status, no adjustments can be performed by the IRS until the filing status changes. Therefore if the standard deductions and the itemized deductions amount to the same value, its better to opt for the standard deductions to avoid any adjustments or having to provide proof. However, if you are subject to AMT (alternative minimum tax), you will save more by itemizing rather than opting for standard deductions even if the amount of itemized deductions is low. The reason for this is that standard deductions don't reduce income subject to AMT while some specific categories of itemized deductions can.
How to Itemized Deductions
Itemized deductions require the tax filer to fill and submit Schedule A and the long form 1040. They cannot use 1040EZ. Most online tax preparation services offer free filing for 1040EZ but not for long form 1040.
In addition, tax filers are also required to retain proof such as invoices and payment receipts for the deductions being itemized. There are no such requirements for claiming the standard deduction.