The standard deduction is a preset amount that you are allowed to deduct from your taxable income each year. This amount will vary according to your tax filing status and has been indexed annually to keep up with inflation. For 2017 taxes, the standard deduction is $6,350 for singles, $9,350 for heads of household and $12.700 for married filing jointly taxpayers. Starting in 2018, though, the tax bill passed in December 2017 almost doubles the standard deduction to $12,000, $18,00 and $24,000 respectively for these three filing groups.
Standard vs. Itemized Deductions
Under the current rules, millions of taxpayers have been able to claim a larger deduction on their tax returns as a result of itemizing their deductions – and that will likely be true this year. To make the most out of your tax return, read on to learn when to itemize your deductions and when to stick with the standard deduction.
Starting in 2018, a change in tax law doubling the standard deduction has made itemizing tax deductions less advantageous for many taxpayers.
And realize that next year, the number of taxpayers for whom itemizing will pay off is likely to drop significantly due to the much bigger standard deduction. (Two caveats: the personal exemption disappears, which may offset this effect for some. On the other hand, the child tax credit doubles and applies to more families, which will push some returns in the other direction.) The new law also eliminates a number of deductions taxpayers currently can take and changes some others. As we discuss this year's deductions, we will note important shifts.
- Itemized deductions allow certain taxpayers to lower their annual income tax bill beyond what they would receive from the standard deduction.
- Itemized deductions include several categories - from medical expenses to mortgage interest to charitable donations.
- Itemizing most often makes sense for higher income earners who also have several items to deduct, such as being a homeowner or business owner.
The Purpose and Nature of Itemized Deductions
Itemized deductions fall into a different category than above-the-line deductions such as self-employment expenses and student loan interest; they are "below-the-line" deductions, or deductions from adjusted gross income. They are computed on the Internal Revenue Service's Schedule A and then the total is carried on to your 1040 form.
Once itemized deductions have been subtracted from your income, the remainder is your actual taxable income. Itemized deductions were created as a social-engineering tool by the government to provide economic incentives for taxpayers to do certain things, such as buy houses and make donations to charities.
So Which Deductions Can Be Itemized?
Schedule A is broken down into several different sections that deal with each type of itemized deduction. For a breakdown of your itemized deductions, see the IRS instructions for Schedule A.
The following is a brief overview of the scope and limits of each category of itemized deduction. To help with future planning, we've included key changes under the new tax law, which mostly applies from tax year 2018 on:
- Unreimbursed Medical and Dental Expenses – This deduction is perhaps the most difficult – and financially painful – to qualify for. It's also a deduction that the new tax law changes for tax year 2017, the taxes you will file in April 2018. For tax years 2017 and 2018 only, taxpayers who incur qualified out-of-pocket medical and/or dental expenses that are not covered by insurance can deduct expenses that exceed 7.5% of their adjusted gross incomes. Starting with tax year 2019 (payable in April 2020), medical deductions return to their current level of 10%.
- Interest Expenses – Homeowners can currently deduct the interest that they pay on their mortgages and home-equity debt. These deductions change under the new tax legislation.
- Home mortgage interest is currently deductible for loans up to $1 million Each year, mortgage lenders mail Form 1098 to borrowers, which details the exact amount of deductible interest and points that they've paid over the past year. Taxpayers who bought or refinanced homes during the year can also deduct the points that they've paid, within certain guidelines. If you are currently deducting loan interest up to $1 million, you can continue to do so. You can even continue if you refinance that same loan, as long as the amount stays the same. However, for any mortgages incurred from Dec. 15, 2017 on, loan interest is only deductible for borrowing up to $750,000. For tax years after 2025, the $1 million limitation reappears regardless of when the loan was taken out.
- Home-equity loan/line of credit interest is currently deductible. Starting with 2019 until the end of 2025, this tax deduction goes away.
- Taxes Paid – Taxpayers who itemize are able to deduct two types of taxes paid on their Schedule A: Personal property taxes, which include real estate taxes, are deductible along with state and local taxes that were assessed for the previous year. However, any refund received by the taxpayer from the state in the previous year must be counted as income if the taxpayer itemized deductions in the previous year. Starting in 2018 until the end of 2025, taxpayers can deduct only $10,000 of these combined taxes. In addition, foreign real estate taxes (not related to a trade or business) are not tax deductible. Also, if you prepaid your 2018 state or local income tax in 2017, that amount is not deductible on your 2017 taxes.
- Charitable Donations – Any donation made to a qualified charity is deductible within certain limitations. Cash contributions that exceed 50% of the taxpayer's adjusted gross income must be carried over to the next year, as well as noncash contributions that exceed 30% of AGI. Starting in 2018 until 2025, that 50% figure becomes 60%.
- Casualty and Theft Losses – Any loss incurred as a result of a casualty or theft can be reported on the Schedule A. Unfortunately, only losses in excess of 10% of the taxpayer's adjusted gross income are actually deductible. If a taxpayer incurs a casualty loss in one year and deducts it on his or her taxes, then any reimbursement that is received in later years must be counted as income. Casualty losses are carried on to the Schedule A from IRS Form 4864. The new tax law eliminates this deduction from 2018 through 2025, except for losses due to a federally declared disaster.
- Unreimbursed Job-Related Expenses and Certain Miscellaneous Deductions – W-2 employees who incur work-related expenses can deduct any aggregated expenditures that exceed 2% of their adjusted gross income. These include items such as equipment and supplies, protective clothing, expenses for maintaining a home office for the convenience of the employer, vehicle expenses, dues to professional organizations and professional subscriptions. Certain other miscellaneous deductions are listed in this section as well, such as income tax preparation and audit fees, and any expenses related to maintaining investments or income-producing property. These fees include such items as IRA or other account-maintenance fees paid out of pocket, legal and accounting fees, and margin interest. The new tax law eliminates these deductions from 2018 through 2025.
- Other Miscellaneous Deductions – This final category of itemized deductions includes items such as gambling losses to the extent of gambling winnings, losses from partnerships or subchapter S-corporations, estate taxes on income in respect of a decedent and certain other expenses. Some of these deductions are eliminated or changed for 2018-2025. For additional details, see IRS Publication 17 and the instructions for Schedule A. For tax years 2018 onward, check with your tax advisor.
Summary of 2019 Tax Law Changes
If you're filing as a single taxpayer in 2019—or you're married and filing separately—you will likely be better off taking the standard deduction of $12,000 if your itemized deductions total less than that amount. The same applies to a married couple filing jointly who have no more than $24,000 in itemized deductions and heads of household whose deductions total no more than $18,000. These deductions almost doubled starting in 2018 after passage of the Tax Cuts and Jobs Act.
Tax Deductions You Can Itemize
- Mortgage interest on a loan of $750,000 or less
- Mortgage insurance premiums
- Charitable contributions
- Medical and dental expenses (over 10% of AGI)
- State and local income, sales and personal property taxes up to $10,000
- Gambling losses
- Investment interest
- $2,500 in student loan interest
- $250 (for educators buying classroom supplies)
Deductions You Lost
- Mortgage interest: loan amounts from $750,000+ to $1 million
- State and local income, sales and personal property taxes beyond $10,000
- Alimony payments
- Moving expenses (except active-duty military)
- Unreimbursed employee expenses
- Job-hunting expenses
- Tax-preparation expenses
- Natural disaster losses (unless in an area designated by the president)
Income Limitations for Itemized Deductions
Itemized deductions for taxpayers with adjusted gross incomes above a certain level (see Form 1040, line 38) may be reduced. The limits depend on your filing status. If you're above them, you'll need to complete the Itemized Deductions Worksheet to determine the amount to enter on line 29 of Schedule A. The amounts are: $313,800, if married filing jointly or a qualifying widow(er); $287,650, if head of household; $261,500, if single; or $156,900, if married filing separately. These limits, known as the "Pease" limitations, are suspended for 2018-2025.
Remember to Aggregate
There are times when the additional deduction realized from excess medical or job-related expenses will allow itemized deductions to exceed the standard deduction. Therefore, you should not simply assume that you cannot deduct miscellaneous expenses or that you cannot itemize deductions if your itemizable deductions are insufficient by themselves for you to qualify.
The Bottom Line
Many rules concerning itemized deductions are beyond the scope of this article. Working with an experienced and competent tax preparer can help to ensure those rules are applied to your tax return. Your tax preparer should also be able to allow you to determine whether you should itemize or take the standard deduction. Be sure to take some time to review what to expect from 2018 through 2025 based on the new tax legislation.