Taking the Standard Deduction or Itemizing Under the New Tax Law

One of the biggest changes in the Tax Cuts and Jobs Act of 2017 (the new tax bill) is that the amount of the standard deduction has nearly doubled.

This change will have an impact on most middle class Americans, including many who typically itemize their deductions.

You may be unsure how this could impact you.

Keep reading to find out.

An Overview

When you (or your tax advisor) prepare your personal income tax return, you report your income in the first section.

However, you don’t pay income tax on all of the income you report.

You are entitled to certain adjustments and deductions to arrive at “taxable income”, which is the amount that your income tax liability is based on.

Your reportable income includes wages, investment income, and business income.

First, you are entitled to certain adjustments to reduce the amount of income you pay tax on.

You get to take advantage of these adjustments whether you take the standard deduction or itemize your deductions.

Adjustments are made for payments for things like self-employed health insurance and student loan interest.

If you own a small business, you also get an adjustment for half of any self-employment tax you are assessed.

After reporting all of your adjustments, you arrive at the part of your personal tax return where you take the standard deduction or report your total itemized deductions.

You typically will report the higher of the two.

Standard Deduction

In 2017, the standard deduction is as follows, depending on your filing status:

• $12,700 – Married Filing Jointly
• $6,350 – Single and Married Filing Separately
• $9,350 – Head of Household

In 2018, the standard deduction will increase to the following, depending on your filing status:

• $24,000 – Married Filing Jointly
• $12,000 – Single and Married Filing Separately
• $18,000 – Head of Household

As you can see, the amount of the standard deduction is nearly doubled across the board.

Itemized Deductions

You can take an itemized deduction for certain expenses, including:

• Medical expenses that exceed 7.5% of your income (for 2018 and 2019)
• State income, sales and property taxes (limited to $10,000 starting in 2018)
• Mortgage interest
• Charitable Contributions

Prior to 2018, you could also deduct certain “miscellaneous expenses” if they exceeded a certain threshold.

These expenses included tax return preparation fees, financial advisor fees and unreimbursed job expenses (auto, home office, tools and supplies).

A deduction for these miscellaneous expenses is eliminated starting in 2018.

These lists aren’t all-inclusive, but include the most common expenses.

Typically, in the past, if you owned a home and had a mortgage you would itemize your deductions because your total itemized deductions were greater than the standard deduction.

With the new tax law changes, this will not be the case for many middle class taxpayers.

Impact of Tax Law Change

One of the goals of the new tax bill was to simplify the rules for the middle class.

By doubling the standard deduction, the government accomplished this goal.

Most Americans that previously itemized their deductions will now take the standard deduction because it will be greater than their total itemized deductions.

While this made preparing a personal income tax return easier, it also eliminated the tax incentives for owning a home and giving to charity in America.

An Example:

The Smiths are a typical, middle class family of 4.

In 2017, they had the following itemized deductions:

• $8,000 in mortgage interest
• $5,000 in state income taxes
• $3,000 in real estate taxes
• $500 in charitable donations

The total of these itemized deductions was $16,500.

Since the standard deduction for married couples filing a joint return was $12,700 in 2017, the Smiths benefited from itemizing.

In 2018, the standard deduction is increased to $24,000, so it will make more sense for them to take the standard deduction if their itemized deductions are similar, as this amount is greater than $16,500.

This means, starting in 2018 the Smiths will not receive any tax benefits for the mortgage interest and real estate taxes they pay or the charitable donations they make.

Next Steps

This is just one of the major changes that was made to the tax rules that will impact middle class taxpayers and small business owners.

I highlight several of the other good and bad changes in this more extensive post.

And I will be answering questions about the new tax bill throughout 2018.

Submit your question or check out the answers to questions others have submitted here.