Itemized Deductions Vs. The Standard Deduction

The new tax reform, which was signed into law in December, will present an interesting question going forward for many taxpayers: should you itemize deductions when you prepare your tax return or claim the standard deduction?

Standard Deduction Increased Significantly

The reason why this is becoming an important question is because the tax reform act nearly doubled the standard deduction, taking effect next year for tax year 2018 (though it bears remembering that the personal exemption has been eliminated, so while the new standard deduction is “better,” it hasn’t really “doubled” at the end of the day).

The standard deduction can be claimed by any taxpayer without having to keep track of deductible expenses, like charitable contributions, mortgage interest, and state and local taxes (the SALT deduction).

About 70% of taxpayers claim the standard deduction, with only 30% itemizing deductions. This is usually because the standard deduction is larger than the total of itemized deductions would be, or they simply don’t want to go through the extra work required to itemize deductions.

The higher a household’s income, the more likely they are to itemize deductions. According to data compiled by the Tax Policy Center, 92% of households with adjusted gross income (AGI) of more than $500,000 itemize deductions, while just 7% of households with AGI of less than $30,000 itemize deductions.

Crunching the Numbers

Before tax reform, the standard deduction for tax year 2018 was scheduled to be $6,500 for singles, $9,550 for heads of household and $13,000 for married couples filing jointly. However, tax reform increased the standard deduction for tax year 2018 to:

This increase will change the equation for many taxpayers, especially those for whom the decision to itemize deductions is a close call.

For example, suppose you are single, your AGI in 2016 was $100,000 and you had $10,000 in itemized deductions. If your AGI and itemized deductions in 2017 are about the same amount, then it probably makes sense to itemize again this year when the standard deduction will be $6,350. (Remember, the higher standard deduction is effective for tax year 2018, for which you’ll file your federal income tax return next spring.)