The standard deduction is increasing for the tax year 2020. You probably won’t notice the … [+]
There is some good news coming in 2020 for the vast majority of taxpayers; the standard deduction will be increasing. Before you run out and start spending, keep in mind the increase is minimal, and you will not likely notice the difference in your paychecks throughout the year.
Under the 2018 tax overhaul, the number of taxpayers itemizing their tax deductions has plummeted. It is expected that more than 90 percent of taxpayers will simply take the standard deduction for tax years 2019 and 2020. That option is easier than itemizing, and for many taxpayers, it will result in a smaller overall tax liability. That being said, you should still check to see if you could benefit from itemizing your tax deductions. Many of my financial planning clients, who live in Los Angeles, will continue to itemize well into the future.
The Internal Revenue Service (IRS) determines what the standard deduction will be each year. For 2020, the decision was made to slightly increase it.
Tax return forms and wage statements with a note saying Taxes Due. An IRS tax return form 1040 and … [+]
The Standard Deduction for 2020
The size of the standard deduction you are allowed to take will depend on the filing status of your tax return for the year. For those who are single (or married filing separately), the standard deduction for 2020 is increasing $200 to $12,400.
If you file your taxes as head of household, your standard deduction will be increasing $300 to $18,650.
For married couples filing jointly, the standard deduction is increasing by $400, up to $24,800 for the tax year 2020.
With an increase in the standard deduction, we may see even fewer people itemize deductions in 2020.
Many homeowners will still find it beneficial to itemize their tax deductions. Especially those … [+]
Should you itemize or take the standard deduction?
For some taxpayers, the choice between the standard deduction and itemizing will boil down to ease of getting their taxes finished. For others, the choice should be made based on the option that will result in the lowest overall tax bill for the year.
The math is pretty straightforward. If you are a married couple with more than $24,800 in tax deductions, you should itemize. If you have fewer tax deductions than that amount, you should take the standard deduction.
Itemizing your tax deduction requires more work and time. So, for those right at the standard deduction level, take the easier route, and choose the standard deduction. For example, if you end up with maybe $24,900 in tax deductions, but you are not sure where all the receipts are, you may just find it easier to opt for the standard deduction.
What tax deductions are Itemizable?
While the Tax Cuts and Jobs Act (TCJA) eliminated many valuable tax breaks and severely capped others, there are many opportunities where proactive tax planning could lower your tax bills.
Here are a few of the major tax deductions people may itemize:
Homeowners are stuck paying interest and property taxes. On the bright side, these expenses may … [+]
Mortgage Deduction
The mortgage deduction has shrunk under the Trump presidency to just the first $750,000 of mortgage debt. However, if you obtained your mortgage before December 15th, 2017, you will still be able to deduct up to $1 million in mortgage debt. Additional restrictions on those deductions have been implemented, so talk with your Certified Financial Planner or CPA to see how much of a mortgage deduction you may qualify for.
State and Local Taxes
Interest On Your Home Equity Line of Credit
The rules have also changed for the deductibility of the interest on a home equity line of credit (HELOC). You can no longer deduct HELOC interest if the debt wasn’t directly used to improve your home.
Donations to Charity
If you donate to a nonprofit, you can receive a tax deduction. Your donation can be in the form of cash or even goods, but you will need to have a receipt to get a tax break for your generosity.
Qualifying for the Medical Expense deduction often requires some major spending.
Medical Expenses
This is another tax break that can be hard to benefit from. Only medical expenses beyond 10% of your adjusted gross income (AGI) is deductible. You will either need to have an extremely low income or terribly high medical expenses, in most cases, to benefit from this tax deduction.
Other Ways to Lower Your Taxes Beyond Itemizing
There are a few tax breaks you can use regardless of whether you choose to itemize or take the standard deduction. For example, you could potentially make tax-saving contributions to a Traditional IRA until April 15th of the following year. You may also qualify to deduct some portion of your student loan interest without itemizing. Similarly, you can still deduct your portion of the self-employment tax even if you take the standard deduction.
Take Time to Choose the Right Options
A larger standard deduction is great for many taxpayers. That being said, don’t just assume that means you should automatically take the standard deduction. If you have the write-offs, you should make an effort to itemize your tax deductions.
You work hard all year to earn an income. Do yourself a favor and take a little extra time to file your taxes in order to keep more of your hard-earned money.