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For 2018 the standard deduction is $12,000 for individuals, $24,000 per household. If someone's itemized deductions equals the standard deduction, or is very close, which one is better to take?

For example, my understanding is if you itemize, then your state refund will be taxable, but not if you take the standard deduction. That makes the standard deduction sound like the better option. Are there reasons I might want to itemize instead, perhaps certain personal or business tax credits are treated more favorably later if I do?

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    Not easy to answer. The problem is that there could be up to 44 different answers, depending on the tax laws of each particular state. (Obviously, in the 7 states with no income tax, it's not going to make a difference.) – jamesqf Apr 16 at 1:14
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    simple answer not worth a full answer: standard is easy. Itemized means you need to actually itemize a bunch of stuff. Your time is valuable too. How long will it take to do a full itemization? – Reinstate Monica Apr 16 at 1:33
  • Adding a comment, since I am not a subject expert. I believe that under AMT std deduction is lost, but the charity portion of the itemized deduction remains. – Chaim Geretz Apr 16 at 18:02
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    @DavidGrinberg but that's a sunk cost: how would you know that itemized deductions equal the standard deduction unless you've already done the work to itemize? – Timbo Apr 17 at 18:30
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Another reason to use standard: audit

If you get selected for an audit of your itemized deduction or a specific category (e.g. all medical expenses or all charitable contributions) then at best you have the time to send in all the receipts, and then answer questions about some. At worst, the auditor disallows something and now your itemized is less than the standard.

Standard is set and done. If your itemized equals the standard, take the standard.

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    If a deduction were disallowed that resulted in your deductions falling below the standard, then you'd amend to use the standard. Audits are typically feared more than is warranted, but itemizing does add some hassle for sure. – Hart CO Apr 15 at 18:43
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    Good point @HartCO but you have still spent the hassle and time and probably some money to send in the receipts. Thanks for the correction. – Damila Apr 15 at 18:59
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    If the IRS is at all logical (perhaps a dubious assumption), auditing someone's itemized deductions that didn't noticeably exceed the standard deduction would be at the very bottom of auditing priorities. – nanoman Apr 15 at 21:47
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    @nanoman While the IRS concentrates audits in returns that are likely to have the most monetary impact, they still randomly select returns to audit, in order to keep everybody honest and to ensure they have a statistically significant model of where issues are occurring. – user71659 Apr 15 at 22:25
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    It is not a matter of caring, the IRS selects random returns for audits. They also have "red flags" for audits, but some are randomly selected. @Harper – Damila Apr 16 at 17:43
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As void_ptr clarified you won't be worse-off itemizing with deductions equivalent to standard deduction because the state refund is only taxable to the extent that the deduction benefited you.

Interestingly, it can actually make sense to itemize even with deductions lower than the standard deduction. For example, in Maryland you cannot itemize at the state level unless you itemized at the federal level. For some people this has meant a lower combined state/federal tax burden when they take itemized deductions below standard deduction, because the decrease in state tax burden has made up for the increase in federal tax burden. This issue was highlighted in this question which shows the tax software making a poor suggestion.

  • Good point about state itemizing. But the state refund taxation is not a concern here. By design, as void_ptr has commented, it will never leave you worse off federally than if you had taken the standard deduction. – nanoman Apr 15 at 21:54
  • @nanoman Thanks for that, I'm trying to find that in the instructions to wrap my head around, but it makes sense so edited away. – Hart CO Apr 15 at 22:10
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There is at least one state (Virginia) where one can only itemize the state tax if one itemizes federal taxes. So you might prefer to itemize the federal tax so as to be able to itemize the state tax if it makes no difference at the federal level. This of course assumes that you would get more at the state level by itemizing than taking the state standard deduction.

This of course could be changed legislatively.

You said

For example, my understanding is if you itemize, then your state refund will be taxable, but not if you take the standard deduction.

This only applies if you itemized last year and took a deduction for state and local taxes. It's not your refund that is taxed, it is the difference in what you said you paid in state and local taxes and what you actually paid. And if you did this, it doesn't matter whether you itemize this year or not. You still have to pay based on the discrepancy between last year's itemization and what was actually paid.

If you are taking the maximum deduction and your refund does not lower the amount paid below the maximum deduction, this also won't matter.

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Yes, it seems what you've linked is also stated here:

If you took a standard deduction last year or itemized deductions but did not itemize the amount of your state income tax, then your state tax refund from the prior year is not taxable.

It seems like they're really incentivizing taking the standard deduction over itemizing this year. I would take the standard deduction if the itemized deductions don't save you more than $100. It saves you time and effort, right? It also saves you the hassle of saving receipts for 7+ years just in case.

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    Only a small portion of state refund will be taxable, if itemized deductions are only slightly higher than the standard one. – void_ptr Apr 15 at 17:22
  • Based on your quote, I would say that a state tax refund is taxable based on what you did last year, regardless of whether you choose to itemize or not this year. – chepner Apr 15 at 17:22
  • It didn't save me much effort since I collected the data throughout the year and adding up everything already, but the point about not having to save receipts for many years is a notable difference. – jimp Apr 15 at 17:29
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I'm not an expert, but everything seems to indicate they're equivalent. Nothing or almost nothing in the tax code should depend on whether you itemized or not.

The state tax refund is really a reflection on whether you itemized last year. If you itemized (including state taxes) for a total of $12,100 of deductions, and later you get a state refund for $200, the IRS takes this as a sign that you should only have deducted 11,900. So, this year, the $200 refund will be treated as taxable income.

Does this mean you should have taken the standard deduction instead? Probably, but it might depend on your personal circumstances (e.g. tax bracket changes), and whether you know the amount you'll get refunded in advance.

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    Note that in your example, only $100 out of the $200 state refund is taxable. – void_ptr Apr 15 at 17:25
  • @void_ptr As I understand it, all of it would be taxable. Can you explain your reasoning? – wide.writing.immediately Apr 15 at 17:27
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    State refund is only taxable to the extent you've actually benefited from deducting your state tax. In this example, itemized deductions are only $100 above the standard one. Source: form 1040 instructions. There's a worksheet in there for that, too. – void_ptr Apr 15 at 17:29
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    It sounds like if my itemized deductions don't exceed the standard deduction by at least the amount I'm expecting from the state refund, then the standard deduction is the better choice. – jimp Apr 15 at 17:32
  • @jimp what if you're wrong about the state refund? – GS - Apologise to Monica Apr 15 at 18:25
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Another reason to take standard deduction is that if you are "married filing separately" (say, working in different states during a prolonged job move while dust settles), you need both either itemize, or both take standard deduction (on federal income tax). And as CCC correctly mentioned, you need to take the same decuction for a state.

protected by JTP - Apologise to Monica Apr 16 at 23:43

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