A standard tax deduction is one of the most effective ways to minimize your taxable income and enjoy savings each year. However, maximizing requires a deeper knowledge and strategy. Learn more about it here.
In this article:
- Understanding the Standard Tax Deduction
- IRS Filing Status Groups
- Standard Deduction Amounts
- Other Changes from the New Tax Law
Standard Tax Deduction | Know the Changes for Tax Year 2018
Understanding the Standard Tax Deduction
One of the ways to reduce your tax burden is to claim deductions. There are two options: itemized deductions and standard tax deduction.
Itemizing deductions means listing all the possible expenses you can claim on your tax return. The maximum amount varies according to factors. These include the laws that govern the deduction, work status, and the tax year.
A standard tax deduction, on the other hand, involves a flat amount you can use to lower your tax liability. You do not need to itemize your deductions.
The basic rule is to use whichever deduction is higher. In other words, if you can significantly reduce your tax burden by itemizing, then you do not claim standard deductions anymore.
IRS Filing Status Groups
The standard tax deduction can differ based on the filing status:
Single – It means you are single or legally separated from your spouse and not eligible for any other filing status.
Married Couples Filing Jointly – This refers to married couples filing a tax return together.
Married Couples Filing Separately – This status refers to a married person filing a tax return separate from their spouse.
Head of Household – You must meet all the following criteria to qualify for this status:
- You must be unmarried as of the last day of the calendar year you are filing taxes for.
- You must prove you paid for more than half the expenses required to maintain the household.
- Your dependent should be living in your home for more than half of a calendar year. The exception to this is dependent parents.
Qualifying Widow or Widower with a Child – Anyone who has lost a spouse can claim this status for two years. It allows you to file a tax return jointly with your deceased spouse if you have a dependent child.
Standard Deduction Amounts
The new tax reform, called the Tax Cuts and Jobs Act, introduced significant changes to the standard tax deduction.
In the tax year 2017, the standard tax deduction was:
- $9,350 for the head of household
- $12,700 for married couples filing jointly
- $6,350 for married couples filing separately and single filers
Under the new law, the standard tax deduction is almost doubled:
- $12,000 for married couples filing separately and single taxpayers
- $24,000 for married couples filing jointly and qualifying widow(er)
- $18,000 for the head of household
Furthermore, anyone over the age of 65 who is legally blind receives an additional $1,600 if filing as single, or $2,400 if filing jointly with their spouse. If you have dependents, you can claim a standard tax deduction only up to your filing status limit.
Note one rule has not changed: each couple should use the same type of deduction. If one of the spouses itemizes the deductions, the other cannot claim standard deductions.
Other Changes from the New Tax Law
The higher standard tax deduction may be good news, but the change may also mean losing other tax breaks:
1. No Personal Exemption
The personal exemption allowed you to claim as much as $4,050 per dependent. The new law suspended this benefit from 2018 to 2025.
2. Caps on State and Local Tax (SALT) Deductions
People living in high-tax cities and states could get relief by claiming certain local and state taxes as deductions. The new law capped it to $10,000.
3. Limits on Home Mortgage and Equity Interest
Mortgage interest tax deduction is not a standard tax deduction, but it is one of the reasons why many prefer to itemize.
The new law lowered the amount of mortgage that can qualify for a deduction. It was decreased from $1,000,000 to $750,000. This figure also applies to combined loans used to build, buy, and improve the first and second homes.
It also suspended the deduction from the interest paid on the lines of credit and home equity loan unless the borrower used the money to build, improve, or buy the property that secures the loan.
4. Natural Disaster Deductions
Anyone with a home damaged by a natural disaster could recoup at least some of their expenses through deductions. The tax law changes stipulated you must live in a presidentially designated disaster area to receive this benefit.
Other deductions you can potentially lose are:
- Alimony payments
- Employee expenses not reimbursed by your company
- Moving expenses (unless you are in the armed forces)
The many changes to both the standard tax deduction and itemized deductions mean you need to be strategic with reducing your tax burden. Which of the two gives you the biggest relief? When in doubt, always call for a professional help.
What do you think of the new changes in the standard tax deduction? Let us know in the comments section below.