Tax Deductions: Should I Take the Standard Deduction or Itemize?

Tax Deductions: Should I Take the Standard Deduction or Itemize?

Key Takeaways

    Itemizing deductions may not make sense for many taxpayers in light of the U.S. tax code changes 

    Learn how the tax code affects specific deductions such as mortgage interest and alimony

As you receive your 2019 tax documents such as W-2s and 1099s, you’re likely starting to put your receipts in order ahead of this year’s April 15 tax filing deadline. Now may also be a good time to think about how deductions can benefit you. 

One of the biggest decisions taxpayers will face is whether to take the standard deduction or itemize. Tax code changes took effect for the 2018 tax year included a higher standard deduction. Many taxpayers who regularly itemized before the tax reform legislation took effect might have found that itemizing was not worth it for the 2018 and 2019 tax years.

Deduction Rules for 2019 Returns

For 2019 returns, the standard deduction is $12,200 for single filers, while for those who file as head of household, it’s $18,350. For married people who file jointly or for qualified widows, the exemption for 2019 is $24,400.

The tax reform legislation brought several changes to what you can deduct if you are itemizing. For example, it limited how much homeowners can deduct for mortgage interest and real estate taxes. There’s a $10,000 combined total deduction limit for income, state, and property taxes. Also, taxpayers can deduct the interest on up to $750,000 of mortgage debt. That’s down from the previous cap of $1 million. 

With the new tax code changes, you may no longer deduct interest on home equity loans—with certain exceptions given for large home improvements—whereas you were able to deduct interest on up to $100,000 of that debt before tax reform code went into effect. You may no longer deduct losses from theft, when previously you could deduct losses that totaled more than 10% of your gross adjusted income. Deductions for moving expenses and miscellaneous expenses such as tax preparation costs or job searching costs were also eliminated.

Those key changes made it trickier for some people to gather enough deductions to itemize for last year’s returns. Consider itemizing if your individual deductions total more than the standard deduction. For example, itemizing may work in your favor if you had large, unreimbursed medical bills or if you made significant contributions to charities in 2019.

To help you determine whether you should take the standard deduction or itemize deductions, create an itemized deductions worksheet. If you have 2019’s returns handy (and you should get those out anyway), look at the Schedule A to identify what you did for last year’s returns.

When Itemizing Is a Better Option

To itemize for 2019 taxes, the taxpayer’s total itemized deductions should exceed the standard deduction under their current filing status—married filing jointly or qualifying widow, single, head of household, or married filing separate.

You can still deduct state and local income or sales taxes, real estate taxes, personal property taxes, and mortgage interest. You may also still deduct contributions to a qualified retirement account like an Individual Retirement Account (IRA), as well as up to $2,500 in interest paid on student loans.

If you do itemize deductions, you can still take the charitable deduction. Under the tax reform law, the deduction limit is now 60% of the taxpayer’s adjusted gross income for cash and gifts, up from 50% previously. In addition, taxpayers can carry that deduction forward for up to five years. So, if your donations do not exceed the standard deduction for this year, you can possibly roll them over for up to five years until you accumulate enough to make itemizing worthwhile.

However, you can’t plan to roll over all your deductions for itemizing later. For example, that doesn’t work with mortgage payments, because the deductible interest paid on the mortgage is filed to the IRS, so lenders must report the interest paid and the balance of the mortgage for that year.

What other individual deductions can you can take for 2019 taxes? For 2019, you can deduct the total qualified unreimbursed medical care expenses for the year that exceeds 7.5% of your adjusted gross income. Starting in 2020, the threshold increases to 10% of adjusted gross income. For those giving or receiving alimony payments, the taxation obligation has essentially reversed. Previously, those paying alimony could deduct that amount, and the payment would be subject to taxation by the recipient. Under the tax reform code, the deduction is eliminated for the person paying, whereas the payment for the person receiving it is tax exempt.

Considering all the tax code changes related to itemizing, this year might be the time to lean on a tax professional for clarity on how the new tax rules will affect your deduction strategy.

TD Ameritrade does not provide tax advice. Clients should consult with a tax advisor with regard to their specific tax circumstances.

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