Author: Matthew Frankel, CFP | April 05, 2019
Tax reform didn’t get rid of too many breaks
The Tax Cuts and Jobs Act made the most significant changes
to the U.S. tax code in three decades, and as part of this, several popular tax
breaks were eliminated beginning with the 2018 tax year. On the other hand,
many popular tax breaks were kept in place, while other tax breaks were either
expanded or newly created.
However, some of the available tax deductions and credits aren’t well-known by many Americans, so here are 14 that are important not to overlook (and what to do if you’ve already overlooked them).
1. Credit for non-child dependents
There are few parents in America who aren’t familiar with
the Child Tax Credit. Thanks to the Tax Cuts and Jobs Act, the credit has been
doubled to $2,000 per qualifying child and is now available to millions more families
than it was before.
In addition, there is now a newly-created $500 credit for dependents who don’t qualify for the Child Tax Credit. Potential examples are children who are 17 or older, aging relatives who live with you, and disabled adults for whom you provide the majority of their support.
2. Pass-through business income deduction
Tax reform created a 20% deduction for “pass through”
income, which was mainly intended to encourage Americans to start businesses of
their own. The deduction is limited for certain high-income individuals, but
generally applies to income that comes from a sole proprietorship, LLC,
partnership, S-Corporation, or any other pass-through entity.
Few business owners will forget to claim this, but this deduction could be easily overlooked by people who earn some of their income from self-employment. As an example, a friend of mine earned about $5,000 in 2018 from consulting work that is paid on a 1099 as an independent contractor -- 20% of this income is deductible.
3. Small charitable deductions
Most taxpayers who make large charitable donations don’t forget about them once tax time rolls around. However, it’s fairly easy to forget about smaller charitable deductions that were made throughout the year. Did you donate $20 to your local high school’s charity car wash? Do you regularly hit the “donate $1” button when paying for your groceries? Donations like these can really add up throughout the year, so start keeping track and saving your receipts.
4. State sales taxes
The state and local taxes deduction, or SALT deduction, has
been in the news quite a bit recently. The Tax Cuts and Jobs Act capped the
total amount of state and local taxes that can be deducted to $10,000 per
return, per year, whereas the deduction used to be unlimited.
One common misconception is that the SALT deduction only includes state and local income and property taxes. However, taxpayers technically have the choice between income or state and local sales taxes. Now, in most states with an income tax, that’s the better way to go. On the other hand, in states without an income tax, the sales tax deduction can be rather lucrative. And you don’t even need to worry about saving receipts -- the IRS has a handy calculator that can compute your sales tax deduction for you.
5. Student loan interest
Millions of taxpayers who typically itemize deductions each
year will no longer find itemizing worthwhile, thanks to the nearly-doubled
However, it’s important to realize that there are a few deductions that can be taken whether you itemize or not. The student loan interest deduction is a big example -- as much as $2,500 in student loan interest per return, per year can be taken as an “above-the-line” deduction. If you’re in the 24% tax bracket, this translates to $600 in annual tax savings.
6. HSA contributions
Most Americans know that contributions to a 401(k), IRA, or
other pre-tax retirement plan can be excluded from taxable income.
However, one often-overlooked form of tax-advantaged savings is the health savings account, or HSA. Available to Americans with qualifying high-deductible health insurance plans, HSAs are actually superior to retirement savings accounts in several important ways.
Like a traditional IRA or pre-tax 401(k), HSA contributions up to the annual limit are tax-deductible. And like those accounts, contributions can be invested, and the investments can grow tax-deferred. Unlike a flexible spending account (FSA), HSA funds can accumulate year-after-year.
Here’s the big benefit -- any money used for qualifying medical expenses can be withdrawn from an HSA 100% tax-free. This triple tax advantage is unique to HSAs and makes these accounts a tax break that eligible Americans shouldn’t overlook.
7. Taking a class for professional development
Many Americans know there is a tax credit for college
tuition known as the American Opportunity Credit. Unfortunately, it is only
usable for the first four years of post-secondary education, and only for
students enrolled in a degree or certificate program.
However, there’s another education tax credit known as the Lifetime Learning Credit that isn’t quite as restrictive. The credit can be used in any year, no matter how long you’ve been out of school. Plus, there’s no requirement to be enrolled in a certain amount of classes or that you’re pursuing a degree or certificate. If you just take a single class for professional development, or simply “just because,” you may be able to use the Lifetime Learning Credit to reduce your tax bill. The credit is worth 20% of as much as $10,000 in qualifying expenses, so it can be quite lucrative.
8. Self-employed health insurance premiums
If you’re self-employed, you
can deduct the health insurance premiums you pay throughout the year, one of
the many tax deductions available to self-employed individuals. One important
fact to point out is that this is true for Medicare premiums as well, as long
as you earn self-employment income.
9. Home office deduction
If your home is your
primary business location, you may be able to take advantage of the home office
deduction. One of the rules of the home office deduction says that the part of
your home that you use as the basis for the deduction must be used exclusively
for business purposes.
However, that doesn’t necessarily mean a separate room needs to be used for your business. It just needs to be a clearly-defined space. So a laptop in your kitchen doesn’t make your kitchen a home office. On the other hand, if there’s an office set up that clearly takes up half of your den, you can potentially take the deduction for that space.
10. Medical expenses
The medical expense
deduction is easy to overlook for the 2018 tax year for two reasons. First,
the threshold for the deduction has been reduced from 10% of AGI to 7.5%. In
other words, if you have adjusted gross income of $50,000, you can now deduct
medical expenses in excess of $3,750, significantly lower than the previous
Second, many Americans simply don’t realize how their qualifying medical expenses add up. As far as your AGI, 7.5% may sound like a lot, but it may not be when you consider how much you’ve spent on doctors visits, dental care, vision care, medical devices, fertility treatments, insurance premiums you pay, and more. The IRS maintains a thorough list of medical expenses, and you may be surprised how much yours added upto in 2018.
11. Educator classroom expenses
Another deduction that
survived the Tax Cuts and Jobs Act is the deduction for up to $250 in
out-of-pocket classroom expenses by K-12 teachers.
If you don’t itemize, don’t worry. This is an above-the-line deduction, which means that you can take it even if you claim the standard deduction. This isn’t a huge tax break, but can certainly help offset any classroom supplies you had to provide for yourself.
12. Gambling losses
If you won a bunch of money
on a trip to Las Vegas last year, you may have been asked to sign a tax form
right there on the spot. To be clear, this is a good problem to have, but it’s
important to realize that gambling winnings are considered taxable income.
However, it’s also important to realize that gambling losses are also deductible, but only to the extent of your winnings. In other words, if you won $2,000 on a slot machine, but then proceeded to give $500 of it back to the casino, your taxable winnings are $1,500.
13. Home equity loan interest (in certain cases)
The Tax Cuts and Jobs Act
kept the mortgage interest deduction, limited to $750,000 in total mortgage
principle, but eliminated the deduction for interest paid on a home equity
loan. Or did it?
To be clear, the separate tax deduction for home equity loan interest has indeed been eliminated. However, the mortgage interest deduction has been modified to include $750,000 in “qualified personal residence debt.” What this means is that if your home equity debt was obtained for the purpose of substantially improving your home, it could still qualify for the deduction. In other words, if you obtained a $50,000 home equity loan to remodel your kitchen, you could potentially deduct the interest you pay on this debt.
14. The standard deduction
As a final thought, it’s
important to tax filers in 2018 to not overlook the standard deduction as
they’re preparing to file. Admittedly, this may sound odd.
However, my point is that although you may have itemized deductions in most previous years doesn’t mean that you’ll be able to do so anymore. For example, married couples with itemized deductions ranging from $12,700 to $24,000 in 2018 would have been better off itemizing under the old tax law, but no longer.
Keep this in mind going forward if you’re one of this group. As an example, I recently helped a married couple file their tax return, and in preparation, I was handed a massive envelope full of organized stacks of receipts and documentation for all deductible items. It must have taken at least a full day’s worth of time to put together. The total of their itemizable deductions? About $15,000.
The point? This couple could have saved a ton of time by looking at their deductions from previous years, realizing not much had changed, and just planning to take the standard deduction.
What if you’ve already filed?
I realize that this is
publishing just over a week before the tax deadline, so if you’re kicking
yourself for not taking advantage of one or more of these tax breaks, don’t be
too hard on yourself. There’s still a way to take advantage.
Even if you’ve already filed your 2018 tax return, it’s possible to retroactively take advantage of a tax break you were entitled to by filing an amended tax return, which is done on IRS Form 1040X. Many tax-prep software providers will help you do this, and although it can be a bit time-consuming, being able to take advantage of an additional tax break or two can make it well worth it.
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