Deductions Galore - Standard vs. Itemized?
Every year during tax season, I get tons of questions from people about how they can "increase" their tax refund and get more money back and one of the things we discuss is if they're going to 'take' the standard or itemize their deductions. The best thing is you get to choose whichever one benefits you more and lowers your tax.
What is the standard deduction?
The standard deduction is a base amount that each taxpayer is allowed to deduct from their total income and not have to pay taxes on it. The amount you get to take depends on your filing status. No additional forms are required to take this deduction. If you are using electronic tax software to prepare your return (which I hope you are) once you select your filing status, the correct amount will be entered on the 1040 form.
Know that the standard deduction amount is adjusted every year to account for inflation and is even higher for those taxpayers that are age 65+ or blind.
On to itemized deductions, what are they?
Itemized deductions are an alternative to taking the standard deduction if you have large amounts of deductions that exceed the standard deduction from the following items COMBINED:
State and local income tax or sales taxes
Real estate and personal property taxes
Mortgage insurance premiums
Donations & charitable contributions
Medical and dental expenses that exceed 7.5% of adjusted gross income
A few years ago, prior to the 2017 Tax Cuts & Jobs Act, many more people were able to itemize because the standard deduction amounts were significantly lower than they are now (think half). It was much easier to come up with total itemized deductions that were way more than the standard deduction. Many financial advisers were even encouraging people to buy homes citing the tax advantage of getting to deduct your mortgage interest and property taxes on your tax return. Unfortunately, that is no longer the case, many taxpayers are losing the opportunity to even capture that as a deduction because it no longer exceeds their standard deduction amount. #adultingsucks
For instance, take someone who filed single in 2018 (for tax year 2017) when the standard deduction was $6350. If they paid $5000 in mortgage interest + $3000 in property taxes + $2000 in charitable contributions, their itemized deductions would total $10,000 so without a doubt they would itemize and reap an additional $3650 being deducted from their total income. (FYI - $10,000-$6,350) Assuming NOTHING changes (I know, I know, this is for simplification) and that same person files in 2020 (for tax year 2019) when the standard deduction is $12,200, they wouldn't even bother to itemize because they are getting a $12,200 standard deduction off the top which is more than the $10,000 they have in itemized deductions. Cool thing is depending on your situation, you can decide which way to go each year!
RELATED: WHOA! You got how much back?
I know there's a lot of negativity surrounding the new tax laws and change is weird and hard sometimes, but the reality is increasing in the standard deduction and lowering the tax rates have benefitted many taxpayers - allowing them to pay a much lower tax bill as they are now being taxed on less of their total income these days. You (or your tax preparer) have to evaluate your full tax situation and figure out which way to go that will best benefit YOU! If you need help figuring it out or just want to take advantage of the FREE consultations that I offer, click here to get started and submit your documents. :)
Until next time,
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