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Understanding Higher Standard Deductions

Understanding Higher Standard Deductions

Higher standard deduction comes with itemizing deduction. According to the IRS, the method reduces your federal income tax, which has dragged more than 30% of taxpayers to the itemizing method. However, according to the nonpartisan Tax Policy Center, the percentage is expected to drop to 10% because of the new tax reform. 

In essence, the IRS may see fewer people itemize their tax returns because of the standard deduction, which has changed from the past:

  • For single filers and married separate filers, it went up to $12,400.

  • For the head of household filers, it went up to $18,650.

  • For married joint filers, it went up to $24,800.

In addition, taxpayers 65 years and above can claim extra deductions like:

  • $1, 600 for single filers

  • $2,600 for married couples filing jointly.

In essence, your deduction has to be higher than the new standard deduction to enjoy the benefits of itemizing tax returns.

The new tax law reduces the tax rate from 35% to 21%. In addition, it decreases many individual tax rates for a decade. Also, the new higher standard deduction has impacted the corporate tax rate. The new higher standard deduction may benefit taxpayers, but it drops how the itemizing method can be used to file taxes because it needs to be higher than the fixed standard deduction. 

Although the IRS has lowered the tax rate, taxpayers that use the itemizing method can experience a rise in taxes because the new law eliminates many standard deductions. For example, sales and property taxes were deducted from the state and local income taxes under the old law, but the new law allows taxpayers only to reduce $10,000 yearly. However, you can deduct unlimited mortgage deductions in the new law. Also, the deduction must come from the first $750,000 mortgage debt. 

The new tax law has an impact on deducting medical expenses from tax. A taxpayer can deduct medical expenses over 7.5% of their adjusted gross income. However, the new higher standard deduction limits the deduction of medical expenses. In addition, the new tax reform does not allow taxpayers to benefit from certain deductions like interest on home equity loans, moving costs, and unreimbursed employee expenses. Plus, you cannot deduct alimony for those paying divorce fees. 

What does this mean for taxpayers?

The new law reduces your taxable income under the standard deduction. For example, if you have a taxable $50,000 as a single filer, by using a standard deduction, the amount will drop to $37,600 compared to $37,800 last year.

A higher standard deduction has more saving options depending on your tax rate and filing status. For example, a taxpayer within the 22% tax rate with an extra $200 in the standard deduction will save $44 for single filers and $88 for joint filers. 

Higher standard deduction results in more significant deductions, leaving you contemplating if an itemizing deduction is more beneficial. To be safer, you can use the itemizing and standard deduction methods to compare which is better for you. In itemizing, a taxpayer gets to add certain deductions like mortgage interest deductions from state and local taxes. If you could use the itemizing method before the new law, you might find that the new higher standard deduction makes it impossible to enjoy such privileges. Instead, you'll enjoy more benefits from filing your taxes using the standard deduction.

In essence, if you're a taxpayer who enjoys itemizing your returns, the new law has significant changes. However, some taxpayers may still benefit from filing taxes using the itemizing formula by maximizing potential tax breaks such as donating to charity. It is best to figure out the differences, the allowed deductions, and how it affects the filing status.