Author: Dan Caplinger | December 20, 2018
These tax breaks will make an impact
Everybody likes tax breaks, but given how complicated tax preparation already is, most people want to make sure there's enough bang -- and bucks -- on tax savings strategies to justify the effort of finding and using them. Fortunately, with some tax credits and deductions, you can save thousands -- sometimes with relatively little work. Even though tax reform changed many tax rules related to tax breaks, you'll find many old favorites on the list. Here are the biggest ones.
1. Adoption tax credit
One of the biggest tax breaks on the books is for those who adopt children. The adoption tax credit reimburses adopting parents for up to $13,810 in qualifying expenses when they file their 2018 tax returns in 2019, including adoption fees, attorney and court costs, and travel expenses while away from home. You can only use the nonrefundable credit against tax you owe, although if you've had tax withheld from your paycheck, that's potentially available as a refund. The credit phases out beginning with those with incomes of $207,140 or more, and completely disappears at $247,140.
2. Standard deduction
Tax reform almost doubled the standard deduction in 2018 to $12,000 for singles and $24,000 for joint filers. The amounts rise in 2019 to $12,200 and $24,400 respectively. It's important to understand that as a deduction rather than a credit, the standard deduction only saves you whatever your tax rate on the amount would've been. Nevertheless, with tax rates ranging from 10% to 37%, a $24,000 standard deduction can save you $2,400 to $8,880 on your tax bill.
3. Earned income tax credit
The earned income credit is available to low- and middle-income taxpayers. The amount varies by family size and income, but those with three qualifying children can claim as much as $6,557. Those with children start seeing their credit phase out in 2019 when income rises above $19,030 for single filers or $24,820 for joint filers, with the credit completely disappearing once income reaches roughly $41,100 to $55,600. A portion of the earned income credit can be refundable even if the taxpayer doesn't have any tax liability, making it especially valuable to those with low incomes.
4. Retirement plan contributions
Those who are eligible for 401(k), 403(b), or similar employer sponsored retirement plans at work can deduct substantial contributions in 2019. The limits are $19,000 for those younger than 50 or $25,000 for those 50 or older. You don't need to itemize to claim these deductions, and they'll typically reduce tax bills by thousands of dollars.
5. American Opportunity tax credit
The American Opportunity tax credit allows eligible students or parents to deduct the first $2,000 in tuition and required fees and course materials each year during four years of undergraduate study, as well as 25% of the next $2,000. That amounts to a $2,500 total credit, with generous income limits that allow the majority of taxpayers to take advantage of the break.
6. Home mortgage interest
Tax reform preserved the itemized deduction for home mortgage interest, with a new limit for new loans of up to $750,000. The previous $1 million limit was grandfathered for existing mortgages as well. You do have to itemize in order to claim this break, but if you have enough deductible interest and other qualified itemized deductions to go over the standard deduction amount, you can save money -- and mortgage interest is often the biggest itemized deduction for those in good health.
7. Child and dependent care tax credit
The child and dependent care tax credit offers a credit on up to $3,000 in care-related expenses for one child or $6,000 for two or more children. The amount of the credit depends on income, with a credit rate ranging from 20% to 35% meaning that taxpayers can save anywhere from $600 to $2,100 by using the credit. With no strict income limits on being able to take the credit, it's a good break for anyone with children under age 13 or who are disabled.
8. Lifetime learning credit
In addition to the American Opportunity tax credit, the lifetime learning credit also offers money back for educational expenses. The credit is 20% for the first $10,000 in eligible costs each year, up to the annual maximum of $2,000. You can't use both credits for the same student, but the lifetime learning credit is a lot more flexible, allowing you to use it on graduate school and even certain continuing education programs.
9. Child tax credit
Tax reform dramatically improved the child tax credit. Its base amount was doubled from $1,000 to $2,000, and low-income taxpayers can get up to $1,400 of the credit back even if they have no other tax liability. The income thresholds also dramatically increased, rising to $200,000 for singles and $400,000 for joint taxpayers in 2018. That'll let a huge number of people who never before got to claim the child tax credit use it going forward.
10. State and local tax deductions
You're still allowed to deduct money you pay to cover state and local taxes, including either income or sales taxes as well as property taxes that you pay. However, tax reform limited the maximum state and local tax deduction to $10,000 -- and you still have to be able to itemize in order to get its benefits. That's bad news for those who suffer big tax burdens at the local level, but you can still get a tax break worth up to $3,700 in some cases.
11. Traditional IRA contributions
Contributions to traditional IRAs are generally deductible for most taxpayers, and while the limits aren't as generous as for employer-sponsored retirement plans, they're still sizable -- and going up in 2019. Those under 50 can contribute $6,000 in 2019, while those 50 or older get an extra $1,000 to bring their total to $7,000. That can translate into thousands in savings to help you with your saving plans.
12. Savers tax credit
The savers tax credit is another incentive designed to help low- and middle-income taxpayers save for retirement. A credit of between 10% and 50% on up to $2,000 in contributions to 401(k)s, IRAs, or other retirement accounts means that each person can claim a credit of $200 to $1,000, with the highest credit amounts going to those with relatively low incomes of less than $19,250 for singles and $38,500 for joint filers in 2019.
Be smart and save on your taxes
Not all of these tax breaks are available to every taxpayer. But anyone can claim at least some of them -- and the more you can qualify to receive, the less you'll have to pay. That's good news for just about everyone.
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