Itemized Deduction
Candlefocus EditorItemized deductions are expenses listed on Schedule A of Form 1040. Examples of itemized deductions include state and local taxes, medical costs, mortgage interest payments, charitable donations, and certain home improvements. These deductions are based on the fact that certain costs may be above and beyond the minimum amount of money necessary to live and that taxpayers should not be taxed on these additional costs.
Prior to the Tax Cuts and Jobs Act, taxpayers who opted to itemize deductions would be able to take advantage of a wider range of expenses. The TCJA limited the number and amount of itemized deductions that are allowed. For instance, state and local taxes are capped; interest on home equity loans no longer qualifies as a deduction; and charitable donations are only deductible up to 60% (previously 100%) of adjusted gross income.
In addition, the standard deduction has been greatly increased for individuals, married couples filing separately, married couples filing jointly, and head of household filers. The standard deduction for individuals rose from $6,350 in 2017 to $12,400 in 2018; the standard deduction for married couples filing jointly rose from $12,700 to $24,800. The increase in standard deduction is one of the major changes enacted in the TCJA. In addition to the increase, the phaseout of itemized deductions has been decreased. This means that if your taxable income is higher, you can still take advantage of itemized deductions.
It is important to determine whether it is beneficial to itemize deductions or take the standard deduction. This decision depends on calculating which amount yields a lower taxable income. For many people, the cost of itemizing deductions is greater than claiming the standard deduction. If you are uncertain, you should consult with a tax professional.
Overall, itemizing deductions is one of the best ways to reduce your tax bill, if itemized deductions exceed the standard deduction. However, taxpayers must be aware of the changes to the deductions that are allowed under the TCJA. A well-informed taxpayer will be aware of which expenses are eligible for itemizing and ensure that the correct deductions are listed on Schedule A of Form 1040.