Standard vs. Itemized Deductions

FOR 2017, THE STANDARD DEDUCTION is $12,700 if your tax-filing status is married filing jointly, $9,350 for heads of household and $6,350 for single individuals. The standard deduction is slightly higher if you are elderly or blind. You take the standard deduction if it’s greater than the sum of your various itemized deductions. In 2014, the standard deduction was claimed on 69% of individual tax returns.

Thanks to the 2017 tax law, the standard deduction will be significantly higher in 2018, at $24,000 for couples, $18,000 for heads of household and $12,000 for others. The slightly higher standard deduction for the elderly and blind remains. Many taxpayers will find that, while they gained from the new law’s higher standard deduction, they lost a comparable sum from the elimination of personal exemptions. In 2017, each personal exemption is worth $4,050, but that tax break disappears starting with the 2018 tax year.

The much higher standard deduction will change the financial calculus for many taxpayers. One example: If you take the standard deduction, you aren’t getting any tax benefit from the mortgage interest you pay, so it may make sense to pay off your mortgage more quickly. You only benefit from the mortgage-interest tax deduction if you itemize your deductions using Schedule A.

Now, imagine you’re married and your itemized deduction in 2018 is $25,000, mostly because of mortgage interest. All that interest might seem like a valuable tax deduction. But arguably, it’s only valuable to the extent that it exceeds 2018’s $24,000 standard deduction—and thus your mortgage interest isn’t generating huge tax savings.

On Schedule A, you also list other deductions, including those for property taxes, medical expenses, charitable contributions, and state and local income taxes. Instead of deducting state and local income taxes, you can deduct state and local sales taxes—a potentially useful deduction for those who live in states with low or no income tax.

But the value of deducting state, local, property and sales taxes, and of itemizing generally, will be greatly reduced for the 2018 tax year and later. There are two reasons. First, the itemized deduction for these various local taxes is capped at $10,000. Second, because the standard deduction is far higher, fewer taxpayers will have enough deductions to make itemizing worthwhile.

Next: Medicare Surtax

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