One of the biggest decisions you have to make when filing your taxes is whether you're going to itemize your deductions or take the standard deduction. This dictates how much of your income is taxable and, therefore, how much you owe, so you don't want to make the wrong choice. But if you're new to filing taxes or you've undergone a major lifestyle change, like starting your own business, you may not know which offers the best deal. Here's a brief guide to help you decide.
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Most people take the standard deduction. This amount is based on your tax filing status, age, and whether or not you're blind. Here are the standard deductions for each tax filing status for the 2018 tax year:
Tax Filing Status
Married, Filing Jointly
Head of Household
Married, Filing Separately
Data source: Internal Revenue Service.
If you accept the standard deduction, your taxable income automatically decreases by this amount. If you're a single person who earned $50,000 in 2018 and you take the standard deduction, you'd reduce your taxable income by $12,000 and you'd only pay income tax on the remaining $38,000.
Single filers and heads of household can add another $1,600 to their 2018 standard deduction if they were 65 or older or legally blind by Jan. 1, 2019. If you were over 65 and legally blind, you can add $3,200. Qualifying widow(er)s and married couples, whether filing jointly or separately, may claim an additional $1,300 per spouse who is over 65 or blind, or an extra $2,600 for a spouse who is blind and over 65.
Itemizing your tax deductions makes sense if you believe the itemized deductions you qualify for exceed the standard deduction for your tax filing status. You can take tax deductions for charitable donations, tax-deferred retirement account contributions, mortgage interest, and medical expenses that exceeded 7.5% of your adjusted gross income (AGI) -- your income minus certain deductions -- in 2018, among other things. Beginning in 2019, medical expenses must exceed 10% of your AGI to qualify as a deductible expense. Self-employed people can also write off expenses related to their business, including a home office, supplies and inventory, and business travel.
You can figure out your total itemized deductions by completing IRS Schedule A. If you're using tax-filing software, it should ask you questions to determine which tax deductions you qualify for. Once you've listed all of your deductions, it should also tell you whether or not the standard deduction will save you more money.
There are a few times where you may have no choice but to itemize your deductions. If you're married but filing separately, you cannot take the standard deduction if your spouse is itemizing his or her deductions. Some nonresident aliens may also have no choice but to itemize deductions.
If you decide to itemize your tax deductions, remember that you need proof of the expenses you're deducting. This means receipts for medical and business expenses, copies of utility bills if you're writing off a home office, and documentation for charitable and retirement contributions. You don't usually need to submit these documents when you file your taxes, but if you're audited, the government can disallow any tax deductions you claimed without proof.
If you're using tax filing software or an accountant, it shouldn't be difficult to determine whether you should itemize your deductions or claim the standard deduction. But it still pays to understand how this works, because what's right for you one year may not be right the next year. The standard deduction may change, or one year you may have a serious accident and owe a lot in medical bills. In that case, you may want to itemize deductions even if you haven't before.
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