Though tax season has only just kicked off, many filers are already in the process of gathering their paperwork, combing through receipts, and taking other such necessary steps to get their returns fired off. And while many filers are plenty used to this routine, remember that this is the first year that taxpayers will be preparing their returns under the new set of rules that took effect in 2018. Therefore, many folks might do things differently this year -- namely, take the standard deduction rather than itemize on their tax returns. In fact, an estimated 90% of taxpayers will be taking the standard deduction on their 2018 taxes, according to TurboTax, which means that even if you've itemized before, it might pay to join the masses this time around.
Itemizing might no longer make sense
Tax filers have two choices when preparing their returns. They can take the standard deduction as dictated by the IRS or they can itemize their deductible expenses in the hopes that doing so will give them a number that exceeds the standard deduction. Though itemizing is the more complicated option of the two, it can result in a higher tax break.
In recent years, a good 70% of tax filers would claim the standard deduction on their taxes, leaving only about 30% to itemize. Folks who itemized in recent years were usually people who racked up a large number of deductions in mortgage interest, property taxes, and charitable contributions, among other things. But changes to the tax code will make it less attractive for filers to itemize this year, when they sit down to do their 2018 taxes.
In 2017, the standard deduction was $6,350 for single tax filers and $12,700 for married couples filing jointly. In 2018, however, these figures nearly doubled to $12,000 for single tax filers, and $24,000 for couples filing joint returns. As such, filers will need to have accumulated a much higher level of deductions to make itemizing worth their while.
Let's imagine you're a married couple with $10,000 in mortgage interest, $5,000 in property taxes, and $2,000 in charitable contributions for a total of $17,000. In the past, it would've made sense for you to itemize, since $17,000 well exceeds the $12,700 standard deduction that was in play for the 2017 tax year. But now, you'd lose money by itemizing, since the standard deduction for 2018 is $7,000 more than the $17,000 in our example.
What's the best move for you?
If you're torn between itemizing versus taking the standard deduction on your taxes this year, the easiest way to answer that question is to do some math. Add up your deductible expenses, compare your total to the standard deduction you qualify for based on your filing status, and go with the higher figure. It's that simple.
There is, however, one exception. Some deductions might slightly increase your chances of a tax audit (keeping in mind that your likelihood of getting audited in the first place is still fairly low). Therefore, if you're married and have, say, $24,300 in itemized deductions, it might pay to just go with the standard $24,000 instead. If your effective tax rate is 30%, you'll lose about $90 in tax savings by going this route, but you'll lower your chances of having your tax return scrutinized. And, if you're used to paying a professional to do your taxes, taking the standard deduction might enable you to complete your return yourself, thereby saving that fee. On the other hand, if your deductions total $28,000 as a married couple filing jointly, that's reason enough to itemize on your 2018 return.
Even though most tax filers will be taking the standard deduction this year, that doesn't mean you'll necessarily be one of them. Therefore, don't wait until the last minute to start working on your taxes. If it turns out that itemizing makes more sense for you, you'll want plenty of time to gather your documentation to arrive at an accurate number.