Should I Itemize or Take the Standard Deduction on my 2018 Tax Return?

If you live in the State of Maryland and several other high income tax states you may have a higher tax liability by taking the higher standard deduction under the new 2018 tax law (Tax Cuts and Jobs Act – TCJA) instead of itemizing your deductions even if they are lower than the new standard deduction of $12,000 for single and $24,000 married filing jointly.  That doesn’t sound right does it?  But you need to do some work or hire a CPA to help you analyze the best outcome for you.

The reason is that the State of Maryland requires resident taxpayers to follow the deduction method they use on the federal Form 1040 on the Maryland 502 tax form.  So if you itemize your deductions on your federal return you must also itemize your deductions on the Maryland return.  As such, if you take the standard deduction on your federal return you must also take the standard deduction on the Maryland return.  This is the case even if the itemized deduction is higher on the state return than the standard deduction…unfortunately you do not have an option.

The knee jerk reaction to the new tax bill is that more taxpayers will be taking the standard deduction because it is higher than if they itemize.  That seems to make sense on the surface but when you actually look at the data, the standard deduction on the Maryland return is lower than if you could itemize and if you itemize both you may have a lower overall tax liability.  Higher on federal but lower on the State return to a greater extent.

You could be leaving some significant money on the table.  A recent return that we prepared had a combined tax liability with the new standard deduction of $16,929.  However, after doing our analysis and reviewing the itemized deductions (although lower than the standard deduction) but higher state itemized deduction the tax liability was $16,537.  A tax savings of $391!

So don’t just do your tax return by taking the new higher standard deduction because you may actually be paying more in tax!

Takeaways:

• Maryland residents need to check their itemized vs standard deductions.
• You need to gather your documents and itemize your deductions.
• Analyze the benefits of the standard deduction on the federal return and Maryland return.
• Analyze the benefits of itemized deductions on the federal return and Maryland return.
• Compare the two and see which one has the lowest tax liability.

Chesapeake Financial Advisors is a fee-only financial planning, investment advisory and tax planning firm with offices in Towson and Columbia, Maryland.

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