Tax Reform Series Part 2- Standard Deduction
As the 2019 tax deadline approaches, many taxpayers will feel the impact of the Tax Cuts and Jobs Act of 2017 for the first time. This law was passed in 2017 and will impact your 2018 tax return that you file in 2019. As you get ready to file your tax return this year, you should prepare for some of the changes that could affect you. Today’s post is part two in the Tax Reform Changes series and will cover the updates to the standard deduction.
Deduction Fundamentals
A tax deduction is a type of tax break that reduces the amount of money you owe the government. Deductions are our friends because they lower the amount of taxes that we must pay!
The standard deduction nearly doubled from 2017 to 2018, from $6,350 to $12,000 for single filers and from $12,700 to $24,000 for married couples filing jointly. In order to lower your taxable income, you can either claim the standard deduction or itemize your deductions. Read more about each option below.
The Standard Deduction
The standard deduction is a fixed dollar amount that reduces the income that you are taxed on. Your standard deduction varies according to your filing status. Approximately two out of every three filers claim the standard deduction. See the chart below for the 2018 standard deductions.
The advantages of the standard deduction are as follows:
It eliminates the need to understand the complexities of the IRS deduction rules.
It allows you to receive a deduction even if you have no expenses that qualify for itemized deductions.
It allows you to avoid maintaining records and receipts of your expenses.
The disadvantages of the standard deduction are as follows:
It may be lower than the amount you could deduct by itemizing your deductions. For example, homeowners often pay more interest and real estate tax than the standard deduction permits; this is the case for me. The amount that I paid in mortgage interest in 2018 exceeded the $12,000 standard deduction amount for single filers; therefore, it makes more sense for me to itemize my deductions.
If you are married and filing separately, and your spouse is itemizing their deductions, then you can’t claim a standard tax deduction.
If you are a dual-status or non-resident alien, you are not eligible for the standard tax deduction.
2018 Standard IRS Tax Deduction Table
Itemizing Deductions
There is a wide range of expenses that you may be able to deduct to lower your tax bill. Deducting these expenses on your tax return is referred to as itemizing. In order to claim these deductions, you will need to provide evidence to support that you incurred these expenses.
If the total amount of these expenses is greater than the standard deduction amount, you should itemize your deductions instead of claiming the standard deduction.
The most common expenses that qualify for itemized deductions are listed below. I will go into greater detail on these items in a later blog post.
Home mortgage interest
Property, state, and local income taxes
Medical expenses
Charitable contributions
The advantage of itemizing your deductions is:
Itemized deductions may add up to more than the standard deduction; if so, you should probably itemize your deductions. The more you can deduct, the less you will pay in taxes.
The disadvantages of itemizing your deductions are:
You must understand the rules. Some itemized deductions have specific rules and criteria. For example, homeowners can deduct interest paid on a home equity loan or home equity line of credit that is no more than $100,000.
You may have to spend more time on your tax return. If you itemize your deductions, you will need to spend time gathering your receipts and supporting documentation, and preparing your tax return.
You will need to provide proof in order to justify your deductions. You must be organized, keep receipts, and have explanations as to why some of your deductions are reasonable. For example, I will be deducting travel costs that I incurred to check on my out-of-state rental property; however, I have a property management company that oversees the rental property in my absence. I have to prove that my travel costs to assess the property are justifiable since I already have a property management company that does this for me.
This year I will be itemizing business expenses from my rental property, charitable contributions, home mortgage interest, and property tax. My itemized deductions will exceed the standard deduction amount of $12,000;therefore, I will be itemizing my deductions.
The Bottom Line
If your itemized deductions are more than the standard deduction, you probably should itemize your deductions. The standard deduction lowers your income by one fixed amount and the itemized deductions are made up of a list of eligible expenses. You can claim whichever lowers your tax bill the most.