Should you itemize deductions or take the standard deduction for tax year 2018 (the taxes you will file in early 2019)? Recent tax legislation has made the standard deduction the best option for many, but don't assume that is true for you. With today's sophisticated tax software, it's relatively easy to calculate your itemized deductions and see if you can deduct more than the standard amount.
First, make sure the standard deduction is even an option that you can take. In some cases, the standard deduction is not permissible – for example, if you are a married couple filing individually and your spouse itemizes, then you should use the IRS Form 1040 Instructions to help you determine your eligibility.
Assuming you are eligible, find the standard deduction for your filing status. From 2018 onwards, the Tax Cuts and Jobs Act of 2017 (TCJA) has almost doubled the standard deduction to $12,000 for single filers or married couples when they file separately, $24,000 for married couples filing jointly or qualified widow(er)s, or $18,000 for those filing as the head of a household. The standard deduction may increase if you are blind or age 65 or above – see the Form 1040 Instructions for details.
At the same time, some deductions have been eliminated and others have been reduced by the TCJA, but the overall limit on itemized deductions that you can take has been repealed.
According to Michael H. Karu, CPA/CFF/CGMA, a partner at Levine, Jacobs & Company, a certified public accounting firm based in Livingston, NJ, "Another change to the tax law is the elimination of personal exemptions." For tax year 2017, every person was entitled to a personal exemption of $4,050, in addition to any itemized deductions. For 2018, those are gone. "This is truly significant, especially to families with several children," says Karu. "For a family of five, two parents and three children, in 2017 there would be an allowable deduction of $20,250." At a 25% tax rate, that translated into tax savings of over $5,000. For 2018 and subsequent years, it's been eliminated.
Review Schedule A and the corresponding instructions to see what deductions may apply to you. Examples include charitable deductions, home mortgage interest, and state/local tax payments. The TCJA increased the percentage of your income eligible for the charitable contribution deduction, but capped eligible state/local tax, sales tax, and property tax at a combined total of $10,000. The deduction for miscellaneous expenses has been eliminated.
The easiest way to complete the Schedule A form to help you calculate your deduction is to use tax software. If you can't afford tax software, the IRS Free File program is available to help.
Remember that you are only comparing deductions from Schedule A to the standard deduction. Deductions like self-employment taxes, student loan interest, and educator expenses are known as above-the-line expenses (lines 23-35 on Schedule 1, to be attached to Form 1040) because they were traditionally above the adjusted gross income (AGI) line on your form. They subtract directly from your AGI and you can claim them even if you don't itemize.
Don't get too used to the 2018 rules, because many of the provisions are scheduled to sunset after 2025. Regardless of the tax rules, the logic behind the calculation is the same every year. Find the standard deduction for your filing status, calculate the deductions using Schedule A and the corresponding forms while incorporating any limitations that apply to you, and find out if the itemized deductions are more than your standard deduction. If you need help beyond what software can provide, consult the IRS Interactive Tax Assistant or contact a qualified tax professional to help you decide.
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