Should You Itemize Deductions Under the New Tax Plan?
Filing your tax return requires many decisions. One of the most important is whether you’ll file with the standard deduction or if you’ll list itemized deductions. This used to be a fairly simple decision: most people itemized their deductions. But changes from the Tax Cuts and Job act of 2017 made this decision a little murkier, as the standard deduction was considerably raised.
While getting advice from your accountant or financial advisor is always the best course of action, we’d like to offer some simple explanations and guidance for these two options.
What is the Standard Deduction?
The standard deduction is a set amount of income that you can deduct on your tax return. The standard deduction differs depending on your life situation/filing status.
How Much is the Standard Deduction?
The table below shows the difference in the standard deduction taken in 2017 versus 2021. As you can see, the changes to the tax plan were significant and greatly increased the set amount covered by the standard deduction. For this reason, taking the standard deduction has become a more popular option for many taxpayers.
|Filing Status||Tax Year 2017||Tax Year 2021|
|Single / Married Filing Separately||$6,350||$12,550|
|Married Filing Jointly||$12,700||$25,100|
|Heads of Household||$9,350||$18,800|
What Are the Advantages of the Standard Deduction?
It is the simplest way to reduce your taxable income on your tax return. Rather than keeping track of expenses, donations, receipts and other information needed for itemized deductions, the standard deduction allows you to deduct the amount set for your circumstances. It is quick and straightforward.
What are Itemized Deductions?
Itemized deductions allow you to lower your taxable income with a list of qualifying expenses. Examples of itemized deductions include real estate mortgage interest, gifts by cash or check, charitable donations, state and local taxes, disaster losses, and more.
What Are the Advantages of Taking Itemized Deductions?
If the total of your itemized deductions is greater than your standard deduction, then itemized deductions would allow you a greater reduction of your taxable income, which should lead to a lower tax bill.
Should You Itemize Your Deductions This Year?
To determine the best answer to this question, you’ll need to do the math. Make a list of all your itemized deductions and their value. When you add up this list, does it total more than the standard deduction for your filing status? If so, it is probably worth the extra time and effort to itemize your deductions.
When Should You Call a Professional for Tax Preparation Advice?
As soon as you have any doubts or questions. Making a mistake on your tax return can not only be costly from a financial perspective, it can also lead to headaches with the IRS for years to come.
To make sure you are filing correctly and getting the most out of your tax return, contact a professional tax preparer or financial advisor for help.