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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?

Chris W. Rea
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jimp
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6 Answers6

70

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.

Damila
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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.

Hart CO
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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.

Brythan
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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.

jed
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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.

Earth
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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.

Peter M. - stands for Monica
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