Should You Itemize or Claim the Standard Deduction?

Itemize Deductions

Taxpayers seeking to obtain the lowest taxable income may be faced with the question of whether to itemize their deductions or take the standard predetermined deduction. Of course, the answer to this question depends on the facts and circumstances of each individual taxpayer, but the following overview will help better understand the decision.

Above-the-Line versus Below-the-Line Deductions

“Above-the-line deductions,” named for where they appear on tax form 1040, can be taken regardless of whether the taxpayer chooses to itemize or take the standard deduction. Examples of above-the-line deductions are IRA contributions and student loan interest payments. After calculating above-the-line deductions, a taxpayer arrives at his adjusted gross income.

Deductions calculated after the adjusted gross income are "below-the-line deductions." This is where the taxpayer chooses between itemizing or taking the standard deduction.

Examples of itemized deductions include:

  • A portion of medical and dental expenses
  • Unreimbursed employee business expenses
  • Property taxes
  • Personal property taxes
  • Home mortgage interest
  • Investment interest
  • Charitable gifts
  • Casualty and theft losses
  • Tax preparation fees

Standard deduction rates for 2017 tax returns were:

  • $6,350 for single filers or married couples filing separately
  • $9,350 for head-of-household filers
  • $12,700 for married couples filing jointly.

When to Itemize & When to Opt for the Standard Deduction

Typically, when the standard deduction amount is lower than the itemized amount, a taxpayer should itemize. For example, a homeowner in the early years of paying down an amortized mortgage (which have proportionately high tax percentages during the first years) may have a very large deductible interest expense and find that an itemized deduction reduces their taxable income more than the standard deduction.

Standard deductions are predetermined deductions based on a taxpayer's tax return status. You do not need to use a full form 1040 to claim this deduction (EZ and short forms can also be used, more here), so it can save the taxpayer some time although our software does work to make this as hassle free as possible.

Moreover, certain individuals may qualify for larger standard deductions. For example, individuals who are 65 and older or visually impaired can claim a higher standard deduction. Also, those who suffered a loss in a presidentially declared disaster zone (in 2017) qualified for an additional standard deduction.

Note that standard deductions have filing limitations. A taxpayer who is married and filing separately cannot claim a standard deduction when the taxpayer's spouse claims an itemized deduction. A nonresident alien, a dual-status alien, or someone who is filing a tax return for a period of less than a year is also not eligible for the standard deduction.

Ultimately, each taxpayer should consider his or her individual circumstances when trying to determine whether to take an itemized or a standard deduction. Homeowners and others who can utilize large mortgage interest or property payments should calculate the benefits carefully.

See the following articles to find out more on valuable deductions for your tax return:
Deductions You Don't Want to Miss
Specific to Self-Employed Taxpayers
Small Business Deductions

Quiz: Are The Following Deductible or Not?

Tax deductions can reduce your taxable income which will lower your overall tax liability, however, knowing what is and isn't deductible can sometimes be difficult. Take this quiz to test your knowledge on the lesser known tax deductions:

True or False: Student loan re-payments are 100% deductible. Answer
False. Loan re-payments aren't deductible, but the interest you pay on the loan may be. Taxpayers are able to deduct the interest they paid on student loans or $2,500 – whichever is the lesser amount. There are some stipulations to this. You can't deduct the interest if you or your spouse is listed as dependent on someone else's tax return.

True or False: Out-of-pocket uniforms and required work supply expenses are typically deductible. Answer
True (in most case). If you are required to wear a uniform for work and your employer asks you to pay for it, you can usually deduct the full cost. To qualify, the clothes must be specifically for work and something you wouldn't normally wear every day. Further, if your employer requires you to come out of your own pocket for supplies, these can often be expensed. For example, many teachers are eligible to deduct expenses for classroom-related education supplies.

Which of the following job searching expenses are deductible? Answer

A. Recruiting and job search costs for identifying new employment opportunities in your profession
B. Relocating out of area for new employment
C. Out-of-pocket interview costs
D. All of the above

D. Expenses like parking while at an interview or fees paid to recruiting services can be deducted. You do need to be actively searching for a job in the same industry as your most recent job to qualify for this deduction. Employment relocation expenses are also deductible. This includes any expenses for moving your belongings to your new home.

True or False: The interest on your car payments is deductible. Answer
False. Unlike mortgage interest, the interest on motor vehicle payments are not deductible. There are auto expenses that may qualify for a deduction, for example the vehicle registration is sometimes deductible, as well as the sales tax paid on the vehicle.

Q&A: How much do you need to itemize on your taxes?

Rather than think about how much is needed to itemize on your taxes, think about the itemized amount you qualify for versus the standardized deduction amount you qualify for. If you're a single taxpayer, you could qualify for a standard deduction of $12,000. For taxpayers who are married filing jointly, it jumps to $24,000. That means if you want to itemize your taxes, you'll need those deductions to total more than the standard deduction matching your filing status. If you don't reach the standard deduction threshold with your itemized deductions, you may want to forgo itemizing on your taxes.

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