When it comes to taxes, no one wants to pay more than necessary. That's why it's important to maximize your tax deductions. Deductions reduce your taxable income -- so if you made $50,000 and had a $1,000 deduction, your taxable income would be just $49,000. Since you don't have to pay taxes on the amount you deducted, your savings is determined by the tax rate at which the income would've been taxed.
When it comes to maximizing your deductions, you have a big decision to make: Will your deductions be larger if you itemize, or should you claim the standard deduction?
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What does it mean to itemize?
When you itemize your deductions you claim specific deductions on your tax return. You'll list the deductions you're claiming on your tax form, and, depending on which deductions you claim, you may need receipts or interest statements or other documents to back up the deductions.
You may need to include supporting documentation or additional forms with your 1040 form for itemized deductions you're claiming, and should definitely have those receipts and statements available in case you're audited.
What does the standard deduction mean?
Taxpayers have an alternative to itemizing: They can take the standard deduction. The standard deduction is automatically available to all tax filers, and taxpayers don't have to do anything to become eligible for this deduction.
The standard deduction is a flat rate that changes annually and is determined based on your filing status. The table below shows how much the standard deduction is in 2018 and in 2019, depending on filing status.
|
Tax Filing Status |
2018 Standard Deduction |
2019 Standard Deduction |
|---|---|---|
|
Married filing jointly |
$24,000 |
$24,400 |
|
Head of household |
$18,000 |
$18,350 |
|
Other filing status |
$12,000 |
$12,200 |
Source: IRS.
If you claim the standard deduction, you cannot itemize. If you itemize, you cannot claim the standard deduction. You have to choose.
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Should you itemize or should you claim the standard deduction?
Since you need to choose between itemizing or claiming the standard deduction, you'll want to choose the option that allows you to subtract the largest amount from your taxable income. After all, the more you can deduct, the more income goes untaxed and the lower your total tax bill.
To figure out which option is right for you, add up the value of itemized deductions you could potentially claim. Then compare this amount to the standard deduction. Some of the most popular deductions you have to itemize to claim include:
- The deduction for mortgage interest: You can deduct interest you pay on mortgages valued at up to $1 million if you purchased your house prior to December 16, 2017, or on mortgages valued at up to $750,000 for homes purchased after the 16th of December (the Tax Cuts and Jobs Act reduced the value of this deduction).
- The deduction for state and local property taxes: Starting in tax year 2018, you can deduct up to $10,000 total in state and local property tax. This includes state income tax and state sales tax, as well as property taxes. Before tax year 2018, there was no cap on this deduction.
- The deduction for charitable contributions: You can generally take a deduction for all contributions you make to eligible charities, although total charitable deductions can't exceed 60% of adjusted gross income.
- A deduction for medical costs: In tax year 2018, you're eligible to deduct care expenses only if they exceed 7.5% of income. For the 2019 tax year, you can claim this deduction if your expenses exceed 10% of income.
Homeowners -- especially with expensive properties in high-tax states -- are much more likely to have enough itemized deductions that it makes sense to itemize instead of claiming the standard deduction. But if you're married filing jointly and only paid $5,000 in deductible mortgage interest and $6,000 in state and local taxes, this $11,000 in combined deductions is far below the $24,000 standard deduction you could claim.
You can claim some deductions without itemizing
When adding up all of your deductions to see if the value exceeds the standard deduction, you need to know there are some deductions you can claim without itemizing. In other words, you can claim these deductions even if you claim the standard deduction.
Some of the most popular deductions you can claim without itemizing include:
- A deduction for retirement account contributions: If you make deductible contributions to an IRA or other tax-advantaged retirement account, you can claim this deduction even without itemizing.
- A deduction for health savings account contributions: If you have a high-deductible health plan, HSA contributions are also deductible, even if you don't itemize.
- A deduction for student loan interest: As long as your income isn't too high to qualify for the deduction, you can deduct up to $2,500 in interest paid on student loans even if you don't itemize. You must be legally obligated to pay the loan, and you must have incurred the loan in pursuit of an eligible degree or certification.
Many of the deductions you can claim without itemizing are called adjustments to income or above the line deductions. Don't factor these in when adding up your deductions to see if the total value of itemized deductions exceeds the standard deduction, since you can claim these anyway.
What's the right choice for you?
For some taxpayers, claiming the standard deduction is clearly the right choice. For others, itemizing makes the most sense. To find out what's right in your situation, check out this 2019 guide to tax deductions. See which deductions you're eligible for, add up the value of deductions you have to itemize to claim, and see if this exceeds the standard deduction. If it does, you should itemize. If it doesn't, claiming the standard deduction is the right call for you.
