No one wants to pay any more tax than is absolutely necessary. But there comes a time when the effort of finding every single deduction, credit, and other tax break just isn't worth it. For many, the prospect of a simple solution that can avoid the hassle of researching hard-to-understand tax provisions is extremely appealing.
Tax reform promised to make preparing tax returns simpler, and there's definitely one area in which lawmakers achieved that goal. Thanks to the increase in the standard deduction, only one out of 10 taxpayers will end up having to itemize deductions on his or her 2018 tax return. Yet although that'll make tax prep simpler for many, it won't necessarily leave those taxpayers better off financially in every case.
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A simple decision
Taxpayers get to choose between taking the standard deduction and itemizing their deductions. The decision-making process is quite easy: If the standard deduction is greater than what you'd get by itemizing, then just take the standard deduction. Only if itemizing gets you a larger deduction does it make sense to choose it over the standard deduction.
What tax reform did was to increase the standard deduction dramatically. The following table gives the changes for each filing status.
2018 standard deduction
|
Filing Status |
Standard Deduction for 2018 Tax Year |
Increase From 2017 |
|---|---|---|
|
Single |
$12,000 |
$5,650 |
|
Married filing jointly |
$24,000 |
$11,300 |
|
Head of household |
$18,000 |
$8,650 |
|
Married filing separately |
$12,000 |
$5,650 |
Data source: IRS.
Some taxpayers get even larger standard deductions. If you're 65 or older, then you can add $1,600 to your standard deduction if you're single or $1,300 if you're married. Those who are blind get the same boost to their standard deduction, and if you're both blind and 65 or older, you get a double-bonus.
Why itemizing is going out of style
Because the standard deduction numbers are larger than they were in previous years, a lot fewer taxpayers will have enough itemized deductions to get over the new higher limits. According to the Tax Policy Center (TPC), about 30% of taxpayers itemized their deductions in past years. However, with the new changes, the TPC estimates that the percentage of returns containing itemized deductions will drop significantly to about 10%. Those who stop simply didn't have the $5,650 to $11,300 in extra itemized deductions to justify continuing to itemize.
Yet not everyone's happy about this, and part of the reason is that many of those who itemized in past years would have continued to itemize in 2018 had it not been for other provisions of the new tax laws. In particular, new limitations on key deductions such as the state and local tax deduction have led to dramatic reductions in the amount of itemized deductions that many taxpayers are allowed to take. Other changes, such as the elimination of items such as moving expenses, tax return prep costs, and various miscellaneous deductions, are also hurting some taxpayers.
Another criticism is that higher standard deductions came at the cost of losing the personal exemption. With each taxpayer getting a $4,050 personal exemption in 2017, the increases to the standard deduction were largely offset by the elimination of this income-reducing provision. For some taxpayers, changes to provisions such as the child tax credit helped to provide extra tax benefits as a trade-off for the personal exemption cut, but not everyone benefited from that move.
Don't sell yourself short
Just because nine out of 10 taxpayers will find it worth their while just to take the standard deduction doesn't mean you shouldn't compare your potential itemized deductions to your standard deduction. Even if it means more work, those one out of 10 who itemize stand to score some extra tax savings.
