Tax Deductions: Get The Nitty-Gritty on Which Ones You Can Claim

A woman is seen from above with her laptop displaying TaxAct software in St. Petersburg, Fla.
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Part of being an American is looking toward Tax Day with either dread or anticipation. Will you have to cut a check to Uncle Sam, or will you get a plump refund?

Tax deductions can tip the scales — a lot — meaning you’ll end up sending less money to the IRS. We all want that, right?

Read on to understand which common tax deductions you could claim.

What Is a Tax Deduction?

Tax deductions, also known as tax write-offs, lower your taxable income so you’ll pay less overall. You can either go with the standard deduction, which is a predetermined amount that is subtracted from your income, or itemized deductions, which take into account your particular expenses such as charitable donations, health care costs and contributions to retirement accounts.

Tax deductions are different from tax credits. A tax deduction decreases your taxable income, whereas a tax credit lowers the amount of taxes you owe the IRS.

Calculating Your Adjusted Gross Income

Deductions are typically calculated from something called your adjusted gross income, or AGI.

Do you know how much you make each year? What about the amount you contribute to retirement? The IRS uses this information and more to calculate your adjusted gross income (AGI), which is the starting point for figuring out your tax bill.

Your AGI includes your wages, alimony, dividends, retirement distributions and business income. If you’ve paid student loan interest, contributed to a traditional IRA or paid into a health savings account, those expenses are deducted. What’s left over is your AGI.

Changes from 2017 Tax Reform

In late 2017, Congress passed the Tax Cuts and Jobs Act, a sweeping overhaul of the federal tax code. The main change affecting everyday Americans was to the standard deduction; before 2018 it was $6,350 for single filers and $12,700 for married couples filing jointly.

Under the new law, it nearly doubled: it’s now $12,000 for individuals and $24,000 for married couples filing jointly.

While this is good news for some people, it comes at the expense of several popular deductions that were eliminated. These include:

  • Job-related moving expenses for non-military
  • Home equity loan interest deduction
  • Casualty and theft losses not covered by insurance
  • Alimony for the person paying spousal support
  • Investment expenses and advisory fees
  • Job search expenses
  • Unreimbursed work expenses

Standard vs. Itemized Deductions

Still, there are numerous itemized deductions still in play. Choosing the standard deduction or itemizing depends on your personal situation.

If your potential deductions equal more than the standard deduction, itemizing will lower your taxable income and save you money.

Here’s another way to think about it: if you’re a young, single person with a full-time job, you’re healthy and you rent rather than own a home, you will almost certainly take the standard deduction because your deductible expenses probably won’t total more than $12,000. But if your financial profile is more complex — think mortgage, property taxes, medical expenses — then you might benefit from itemizing.

FROM THE TAXES FORUM

Popular Tax Deductions for Itemizers

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If you’re thinking of itemizing, you need to know what is and isn’t tax deductible. Here are some common deductions.

1. Charitable Contributions

If you gave money or goods to a charity during the year, you could be eligible for a tax deduction. The organization must be designated as a nonprofit by the IRS. Usually these are religious, educational or charitable groups.

There are some limitations on what you can include in this deduction. For example, if you donated to your local PBS station and they sent you a “thank you” T-shirt, you can’t deduct the value of the shirt. So if your contribution was $100 and the T-shirt was worth $10, you can only deduct $90 on your tax return.

Additionally, you can only deduct charitable contributions up to 50% of your AGI. (Most people can’t donate half their income to charity anyway.) But there are additional limits depending on the organization. Donations to churches, hospitals and colleges qualify up to 50% of AGI, but contributions to veterans’ organizations and fraternal societies have a lower cap — only 30% of AGI.

Pro Tip

You can deduct expenses from charitable work. For example, if you knit hats for a homeless charity you could deduct the cost of the yarn. Save your receipts in case you’re hit with an audit.

2. Mortgage Interest

The interest you pay on your home mortgage can total many thousands of dollars, particularly at the beginning of the loan. Luckily, you can deduct that interest from your taxable income. This is applicable for debt up to $750,000 (married) or $375,000 (single) as of 2018.

If you bought your home on or before Dec. 15, 2017, you can deduct mortgage interest on debt up to $1 million (married) or $500,000 (single).

3. Property Taxes

The 2017 tax reform put new limits on property tax deductions. Beginning in 2018, you can deduct property taxes up to $10,000 (married filing jointly) or $5,000 (single or married filing separately) but those caps include any deductions you claim on state and local income taxes, as well as sales taxes. Before, you could deduct those amounts separately — and potentially get a bigger deduction. No more.

4. Medical Expenses

If you had significant medical expenses last tax year, you could get a deduction. The bills must equal 7.5% or higher of your AGI to qualify for the deduction. For someone with an AGI of $50,000, that means you can’t deduct medical expenses until they exceed $3,750, or 7.5%,

Note: The percentage is different in some states, so do your research.

Qualified medical expenses include:

  • Bills paid to doctors, dentists, chiropractors and more
  • Hospital visits or stays
  • Nursing home care
  • Some weight loss programs
  • Addiction programs
  • Prescription medications
  • Transportation to and from medical appointments
  • Acupuncture
  • Dentures, crutches, hearing aids, wheelchairs and service animals
  • Reading or prescription glasses or contact lenses

Deductions You Can Claim with the Standard Deduction

Even if you don’t itemize, you can still claim some valuable deductions. They’re known as “above-the-line” deductions.

1. Educator Expenses

In an ideal world, teachers wouldn’t have to pay out of pocket for school supplies. In reality, most teachers routinely dip into their own funds to buy pencils, paper, glue and other items for their classrooms. The IRS allows K-12 teachers to deduct up to $250 for educator expenses such as classroom materials.

2. Student Loan Interest

If you paid interest on your student loans, you can deduct up to $2,500 in interest payments if you earned less than $65,000. Above that, the deduction phases out, but those earning up to $80,000 can get a reduced deduction.

This only applies for people filing their own tax returns; if you’re still listed as a dependent on your parents’ tax return you can’t claim the student loan interest deduction. You also can’t claim this deduction if your loan isn’t in your name. So, if your parents took out the loan on your behalf, they will get the deduction instead.

3. Moving Expenses for Military

Members of the military are eligible to deduct moving expenses from their taxable income. In previous years, civilians could also deduct moving expenses, but the deduction is now limited to military personnel.

4. Health Savings Account Contributions

Health savings accounts, or HSAs, are offered by insurance companies on high-deductible plans. For a single filer, that means a plan with an out-of-pocket maximum of $6,550 and a minimum deductible of $1,300. For a family plan, that increases to a $13,100 out-of-pocket maximum and a minimum deductible of $2,600. HSA contributions are pre-tax, much like an employer-sponsored 401(k).

Your contributions to your HSA are tax-deductible. The exception is if you live in California or New Jersey, as these states don’t allow deductions for HSA contributions.

5. Self-Employment Expenses

If you’re self-employed, you can deduct quite a few expenses. These include:

  • Home office: You can deduct the space devoted to your home office at a rate of $5 per square foot for up to 300 square feet of space. However, you must use this room exclusively as your home office, so you can’t set up a desk next to your spare bed and claim that as your office. You also must use that room regularly for business.
  • Education: As a self-employed individual, you can deduct things like tuition, books and lab fees for education that “maintains or improves skills needed in your present work,” according to the IRS.
  • Car: If you use your car for business, such as driving to meetings with clients or vendors, you can deduct 54.5 cents per mile (as of 2018). You can also deduct things like gas, licenses, tolls and parking fees.

6. Health Insurance Premiums

If you are self-employed and pay for your premiums with after-tax dollars, you can deduct them.

You can also take the deduction if you get your health insurance through a state or federal marketplace, but only for the money you pay out of pocket. Any subsidies you receive are not deductible.

7. IRA Contributions

You could get a tax deduction if you contribute to a traditional IRA as part of your retirement savings portfolio. The maximum contribution for 2018 is $5,500, or $6,500 for those over age 50, and it’s fully tax deductible. (Beginning in 2019, those limits are $6,000 and $7,000, respectively.) But your eligibility also depends on how much money you make and whether you or your spouse has an employer-sponsored retirement plan. Consult the IRS guidelines for those income limits.

Every tax season, it’s worth your while to consider which tax deductions

you might be eligible for, whether you itemize or not.

Catherine Hiles lives in Ohio with her husband and their two children. By day she manages a team of writers and graphic designers, and catches up on her own writing in her spare time.