With a number of IRS updates and new rules passed through the 2017 Tax Cuts and Jobs Act, tax payers should make sure to review changes in standard deductions that took effect January 1, 2018, and will be applicable through December 31, 2025.
Essentially, standard deductions are flat dollar amounts that can be subtracted from an individual’s adjusted gross income (“AGI”), thereby lowering their taxable income and consequently their taxes. This dollar amount is adjusted each year for inflation.
Itemizing is another deduction method that you can use to reduce your tax liabilities. It comprises manually itemizing individual expenses that are eligible as deductions. Charitable donations, mortgage interest on homes or real estate, certain medical expenses, and uninsured losses from theft or casualty all qualify as deductions when itemizing.
It’s important to note that you cannot take both the standard deduction and itemize on your tax return.
Why the Standard Deduction is Preferred
For the 2018 tax year, tax payers are entitled to larger deductions. Notably, single filers and married filers filing separately are allowed a standard deduction of $12,000 compared to $6,500 in the prior year. The deduction has also increased to $24,000 for married filers filing jointly. Under the previous law, this deduction was $12,700.
For heads of households, the deduction is now $18,000, up from $9,550 in 2017. For tax payers above the age of 65 or the blind, these deductions are $1,300 higher. Unmarried taxpayers or those without a surviving spouse can claim an additional $1,600 as standard deductions.
Most Americans opt for this deduction method since it is easy, more convenient, and time saving. It’s also an automatic process with preset deductions, and thus eliminates the need to delve deep into the tax laws.
In fact, according to AARP, only about 30% of tax filers now itemize, while others choose to claim the standard deduction.
However, with the standard deduction caps raised, the number of filers itemizing deductions will likely plummet significantly, as they can now easily get equivalent deductions without needing to show proof of the deductible expense, as is the case with itemizing.
There are some limitations to the standard deduction. For instance, the standard deduction cannot be claimed if the filer’s spouse, filing separately, itemizes deductions, or by a person filing a tax return for a period less than a year.
It should also be noted that the new tax law eliminated personal exemptions, which is an amount of money that you were able to deduct for yourself and for each of your dependents.
But, if an individual keeps a good record of their expenses, and if those qualify as deductions, itemizing may be a good option, since such deductions aggregately exceed the standard deduction.
Tips to Consider
If your itemizable deductions for 2018 are expected to be close to the standard deduction amount, you might consider a few financial maneuvers before the end of the year to take advantage of the situation.
Additional expenditures like a few pre-payments, which are eligible as itemized deductions, can be done. This will lower your current year’s tax bill. And then next year, you can claim a higher deduction since the standard deduction will likely increase due to inflation.
So, tax payers may want to consider making extra house payments and higher charitable donations this year, and lowering expenditures next year.
Make sure to review your expenses and consider both the standard deduction and itemizing to see which is best for your own tax situation, and which method will be able to greater reduce your tax liability.
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