Should You Itemize or Claim the Standard Deduction?
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.