One of the most common discussions I have with clients is regarding itemized deductions. In last weeks blog I explained itemized deductions, but I wanted to explain the difference in a little more detail. I find that so many clients who previously used online software to self-prepare have no clue they actually were using the standard deduction and not itemizing.
As we discussed in my last blog, on each tax return you either get the standard deduction or itemized deductions. First, let me explain the standard deduction.
The standard deduction is just as the name implies, standard. Every single taxpayer is eligible for this deduction (Gets a little tricky on married filing separately, but that's a conversation for a different day). How much the standard deduction is depends on filing status. Single or married filing separately filers receive a standard deduction of $12,000 under the new tax law. Head of house hold filers (one taxpayer and at least one dependent) receive a standard deduction of $18,000. And married filing joint return filers receive a standard deduction of $24,000. The standard deduction automatically lowers your taxable income. For example, a single woman making $50,000 on her W2 would only pay taxes on $38,000 of her income without having any other deductions.
If a taxpayer or taxpayers have itemized deductions (allowable medical expenses, state tax, real estate and property tax, mortgage interest, mortgage insurance, and charitable contributions) totaling MORE THAN their filing status's standard deduction, then that taxpayer can itemize and get a deduction larger than a taxpayer who doesn't reach that limit. This means, from our previous example, if the single woman making $50,000 had itemized deductions totaling $12,005, she would pay tax on $37,995 of her income before taking into consideration any other eligible deductions.
As you can see from these examples, it takes a lot of itemized deductions to achieve a total larger than your standard deduction. Especially for 2018 tax year filings, as the standard deduction amounts were doubled. A lot of taxpayers I sit down with believe they have itemized for many years because their online software has them enter all this information, however, when we actually look at the numbers.....they were using the standard deduction all along. This is why I feel it is SO important to work with a tax professional so you can actually understand how your tax refund or bill amount was achieved.
If you have any questions, comments, or to set up a tax consultation, please send me a message or call my office at 314-450-1140.