Even though the tax filing season has just begun, U.S. tax payers may be wondering which deduction method is appropriate for them: the standard deduction or itemizing.
While the standard deduction is the government's built-in deduction that can be considered while preparing taxes, itemizing consists of qualifying individual expenses that can be deducted to lower payable taxes.
Read more about the standard deduction here.
Now that the standard deduction has been nearly doubled, many people may have little choice but to take it, as it will likely be difficult to itemize and reach that $12,000 threshold. But, exploring the potential benefits of itemizing can’t hurt, and could even pay off handsomely. You can start by listing your itemized expenses on Schedule A of IRS Form 1040. If the total number of these applicable itemized deductions is lower than the standard deduction, you will not be able to itemize.
Let’s look into some important updates for itemized deductions applicable for the 2019 tax filing season:
If you have a mortgage outstanding: The mortgage interest deduction is now at a lower threshold. While previous interest paid on new mortgages of up to $1 million could be written off, this limit is now at $750,000. Nonetheless, since the average U.S. mortgage is well below $750,000, the majority of homeowners remain unaffected by this change.
State and local taxes: The state and local tax deduction, also known as SALT, is another substantial expense that is itemized. Previously uncapped, this property tax deduction stands at a limit of $10,000 for all state and local taxes combined. This significantly changes the tax bill for many individuals living in high-tax states, including New York, California and Illinois.
If you have paid for medical expenses: Up until this year, qualified medical expenses equal to 7.5% of your adjusted gross income, can be claimed. On January 1, 2019, the deduction limit increased to 10%.
It is important to determine if you're eligible for both deduction options, as in certain cases you may not be allowed to claim the standard deduction at all. This includes a person who is classified as a nonresident alien, a married person filing separately with a spouse who is itemizing, and a person who alerted his accounting cycle and is not filing for a full 12-month period.
In other cases, taking the standard deduction is recommended, although itemizing may look appealing. This commonly happens when your state income tax withheld is a significant portion of itemized deductions. A state income tax refund received in the previous year has to be reported as income on your federal tax return. In order to avoid reporting large state refunds as income on a federal return, it is advisable to claim the standard deduction.
Alternatively, there are situations where itemizing is apt even though the standard deduction is higher. Case in point: when your state offers a low standard deduction but permits itemized deductions for federal returns. In these cases, it may be judicious to opt for a smaller deduction on your federal return in exchange for a higher deduction on your state return.
It’s also important to note that you can receive above-the-line deductions and tax credits even if you choose to take the standard deduction. Tax credits are more valuable as they reduce your income tax liability on a dollar-to-dollar basis.
There is no right or wrong while making a choice between itemizing and taking the standard deduction, as it completely depends on individual situations. Nonetheless, it is important to note that you may have to show proof of your expenses if you opt for itemizing.
Also, if it is a close call between both the options, it is fitting to take the standard deduction, given the added hassle of itemizing. Further, some deductions may increase the chances of an IRS audit, making the standard deduction a worthwhile option.
Nonetheless, mortgage interest and property taxes can contribute a significant portion of your deductions, and even a small mortgage could put you over the standard deduction limit, resulting in significant tax savings.
Crunching the numbers to see which deductions are available for you can help in deciding which path to pursue while preparing your return.
A Simple Way to Build Wealth
No matter what your financial goals are, investing in quality stocks is an option worth considering. Stocks have produced better returns than other kinds of investments over the years and generated significant wealth for shareholders. If you're interested in stocks but you're nervous about picking the right ones, Zacks can help. Our research team makes it simple to find long-term buys with long-term wealth-building potential. Starting today, you can see our private selection of stocks priced under $10, Warren Buffett-style value picks, dividend stocks and more. Click here for your sneak peek >>