Should I Take the Standard Deduction or Itemize?

Taking all the deductions you can is essential to minimizing your tax bill. Itemizing your deductions can take a lot of work, but it's worth it if you can get a bigger tax break by doing so than you'd get by taking the standard deduction.

However, there are some things you'll need to keep in mind when you're deciding whether to itemize or take the standard deduction. Even if your initial estimate might make it look like one way is smarter, there are some little-known rules that could lead to a better outcome if you choose the other strategy. Let's look more closely at the numbers involved and when it might make sense to consider some additional factors in your decision.

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A matter of math

The first question to ask is whether your standard deduction is greater than the itemized deductions you could take. For your 2017 tax return, the standard deduction amounts are as follows:

Source: IRS.

Those numbers apply if you're younger than 65 and you don't qualify as blind. The IRS gives additional standard deduction amounts to older Americans and those who are blind. For singles or heads of household, add $1,550 to your regular standard deduction if you're blind or you're 65 or older. You get add $1,550 twice if both conditions apply. For married filers, the add-on for those conditions is $1,250 each.

There's no question that the standard deduction is easy to take. By contrast, to calculate itemized deductions, you have to add up a number of different things. Mortgage interest, charitable contributions, and state and local taxes are just a few of the many items that qualify as itemized deductions. Some things, such as medical expenses, are only deductible if they add up to more than a certain percentage of your adjusted gross income. That can make the math extremely complicated, but it still makes sense in most cases that if your itemized deductions add up to more than your standard deduction, you should go ahead and file Schedule A to claim the bigger tax break.

When the basic rule is wrong

However, there are a couple of situations in which you might reach a different conclusion about taking the standard deduction or itemizing. First, those upper-income taxpayers who have to deal with what's known as the Pease limitation on itemized deductions might have their total allowed itemized deductions reduced. This provision takes effect in 2017 for those whose income is above the following amounts:

Source: IRS.

If your income is above those levels, then your itemized deductions get cut by 3% of the amount by which your income exceeds the threshold. For example, if you're single and have income of $271,500, then your income is $10,000 over the limit, so you'd have to cut your itemized deductions by 3% of $10,000 or $300. You can never be forced to take less than 20% of the itemized deductions you'd ordinarily be entitled to, but in some cases, the reduction is enough to make the standard deduction a better bet.

The other situation involves married couples who file separately. If you take the standard deduction, then your spouse isn't allowed to itemize. In some cases, the total deductions that you and your spouse will be able to take will be higher if you itemize even if the itemized deductions on your return are below the standard deduction threshold.

Be smart about itemizing

It pays to run the numbers to figure out whether it's smarter to take the standard deduction or to itemize. Just make sure you know all the intricacies about little-known rules before you make your final decision.