Standard Deduction vs Itemized Deduction – What’s The Difference?

The Premise

It’s one of the most important questions that every American tax filer has to answer: should I itemize or take the standard deduction instead? With the Tax Cuts and Jobs Act of 2017 making some fairly significant changes to the way both standard deduction and itemized deduction work, the question may seem even more complicated. Not to worry: here’s a quick look at the standard deduction vs itemized deduction question and what you should consider when planning your tax strategy.

The Basics of How the Standard Deduction Works

Before we look at the recent changes to the tax code and why a taxpayer may choose to take the standard deduction vs itemized deduction, let’s look at the basic mechanics of each.

The standard deduction is a set amount determined by the law that a qualified taxpayer can deduct–or subtract–from their overall taxable income. Almost everyone who does not itemize deductions qualifies to take the standard deduction. There are a couple of exceptions. Nonresident aliens don’t qualify for the standard deduction. When two spouses are filing separately and one spouse uses itemized deductions, the other spouse cannot take the standard deduction; they must itemize as well.

The amount of the standard deduction usually changes every year. For the 2018 tax year–that is, for taxes filed for 2019–the standard deduction is $12,000 for individuals and spouses filing separately, $18,000 for those filing as head of household and $24,000 for spouses filing together and surviving spouses. The blind or aged can claim an additional $1,300 if filing as married or $1,600 if filing as unmarried.

How Itemized Deduction Differs from the Standard Deduction

Like the standard deduction, itemized deduction also reduces the amount of your total taxable income. The difference is you claim each individually qualified deduction rather than taking the set sum of the standard deduction. There are a wide range of expenses that qualify to be deducted from your taxable income via itemized deductions, including home mortgage interest, state and local taxes, real estate taxes, property taxes, and charitable donations.

What’s Changed for the 2018 Tax Year?

The Tax Cuts and Jobs Act of 2017 changes several rules related to the standard and itemized deductions. Even if you’re familiar with the differences between the two, you should become more acquainted with the new law as the changes may shift which path is likely to save you more on your taxes.

First, the amount of the standard deduction went up significantly. While the IRS does usually increase the standard deduction slightly from year to year, this year will see a huge jump over 2017. Individual filers, heads of household, and married filers (both those filing together and those filing separately) will see the standard deduction almost double over the previous year.

Second, a couple of categories of expenses that were previously able to be claimed as itemized deductions have been eliminated. “Miscellaneous itemized expenses”–which included tax preparation fees, unreimbursed employee expenses, and investment management fees–can no longer be deducted. Home equity loan interest also can no longer be deducted, and only those in disaster areas will be able to claim theft or casualty losses. Lastly, the amount that can be deducted for taxes paid to local or state governments is now capped at $10,000 per return, with married taxpayers filing separately limited to $5,000.

Lastly, a slight change has been made to the medical expense deduction. Since the passage of the Affordable Care Act (ACA), taxpayers were only able to take medical expenses as an itemized deduction if they equaled more than 10 percent of the taxpayer’s adjusted gross income. The Tax Cuts and Jobs Act of 2017 changed the floor for this deduction to 7.5 percent of the taxpayer’s adjusted gross income, the level it was at prior to the ACA.

So Should I Take the Standard Deduction or Itemize?

Whether you should itemize your deductions or take the standard deduction largely boils down to which deduction is bigger. This should be fairly intuitive. If the standard deduction that you qualify for is greater than the sum of your itemized deductions, you should take the standard deduction. On the other hand, if the total of your itemized deductions exceeds the standard deduction, you will probably benefit from itemizing your deductions instead.

Keep in mind that we say probably because itemizing your deductions does have certain downsides as compared to taking the standard deduction. Filling out all of the forms required to itemize takes significantly longer than simply claiming the standard deduction. Moreover, you run a greater risk of getting in trouble with the IRS if you don’t understand all the rules for itemized deductions (such as how large your medical expenses must be before you can deduct them). You’ll also need to have proof for each of your itemized deductions; that means that if you didn’t keep organized records and retain important receipts this year, you may not want to go the itemized route.

If you can, the best way to ensure that you save the most money on your taxes is to figure out your return using both the standard deduction and itemizing deductions. Most tax software programs make this process somewhat easy. Simply answer all of the questions that your tax software asks you related to itemized deductions, and the program can show you which deduction method results in a lower tax bill. If you’re working with a tax advisor, they can likely help you in the same way.