As we settle into the new year, countless Americans are anxiously waiting to see how they'll fare in the face of tax reform. But whether the new rules end up helping or hurting you, there's one trend we're likely to see across the board in light of recent changes -- a growing number of filers will stop itemizing on their tax returns and opt for the standard deduction instead. The question is: Will you be one of them?
Itemized versus standard deductions
Let's review your two basic options for filing a tax return: itemizing your deductible expenses, or taking the standard deduction. The latter figure is determined by the IRS, and it exempts a portion of your income from taxation off the bat.
Last year, the standard deduction was $6,350 for single tax filers, and $12,700 for married couples filing jointly. If you're a single tax filer sitting down to do your 2017 return, you'd need to ask yourself the following question: Do my deductible expenses exceed $6,350? If so, then itemizing would make the most sense. If not, the standard deduction is the way to go.
Why fewer people will itemize going forward
Before we discuss why fewer filers are likely to itemize on their 2018 taxes, remember that the bulk of Americans currently don't itemize. Roughly 70% of the tax-paying population takes the standard deduction, either because it makes the most sense financially, or because it's the least complicated route to follow. But the main reason why we're likely to see an uptick in filers going with the standard deduction is that it's nearly doubling for the current tax year. Single tax filers will be eligible for a $12,000 standard deduction on their 2018 returns, while married couples filing jointly will get to take a $24,000 standard deduction.
Let's say you're a couple filing jointly whose deductible expenses last year equaled $20,000. In that case, itemizing would've been a no-brainer, because the standard deduction was a mere $12,700. But if your deductible expenses this year remain at that same level, it will no longer pay to itemize with a $24,000 standard deduction right there at your fingertips.
But an increased standard deduction isn't the only reason why fewer people are likely to itemize going forward. The SALT (state and local tax) deduction, which has long been one of the most substantial deductions for taxpayers, is being capped this year at $10,000. Previously, it was unlimited. This means that if your state income and property taxes last year equaled $16,000, you could deduct that amount entirely. This year, only $10,000 of that total is deductible.
Of course, the SALT deduction is only one of many available to taxpayers at present. The mortgage interest deduction, for example, is still intact, albeit at a lower threshold. Whereas you could previously write off the interest paid on loans of up to $1 million, this limit now sits at $750,000. Still, most homeowners won't be impacted by this change, since the average U.S. mortgage is well below $750,000. Furthermore, no changes have been made to the charitable contributions deduction, which means that if you're extra generous this year, you can use that to your advantage when you sit down to file your tax return.
What's the right move for you?
The question still remains: Will it make sense for you to itemize on your 2018 return? And the answer is: It depends on how the numbers shake out. If you manage to rack up more than $12,000 in deductible expenses as a single tax filer, or more than $24,000 worth as a joint filer, then going through the legwork of itemizing could end up saving you money. But if changes to the tax code, combined with a more generous standard deduction, leave you with less than these figures, it obviously pays to go with the standard.
What if you're really close? If you're looking at, say, a $200 or $300 difference between itemizing or going with the standard deduction, I'd honestly recommend taking the standard deduction, because what little tax savings you stand to gain may not be worth the added hassle of itemizing. Also keep in mind that certain deductions could increase your chance of an IRS audit, so if taking the standard deduction means lowering your risk, but also paying, say, $80 more in taxes, it may be worthwhile.
Finally, taking the standard deduction could end up saving you money on tax preparation fees -- and that's reason enough to go this route when the benefits you stand to reap by itemizing aren't all that significant.