All the Tax Deductions You Can Take for 2018

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This tax season promises to be an...interesting one, with the government shutdown and new tax law provisions colliding to create a perfect storm of confusion and inefficiency.

We’ll get to implications of the shutdown in a later post. For now, it’s important to understand how the Tax Cuts and Jobs Act changed up the credits and deductions available to tax payers. Here’s what to know about tax deductions for tax year 2018.

Tax Deductions

Tax deductions lower your taxes by lowering the income you pay taxes on. So, for example, if your income is $50,000 and you take the standard deduction of $12,000 this year, you pay taxes on $38,000. (If you’re really curious how your income is taxed, read this piece on marginal tax rates.)

You have the option of taking the standard deduction:

  • Standard Deduction: The tax law raised the standard deduction to $12,000 for 2018 for individuals, and $24,000 for married couples, making it more attractive for more filers.

Or itemizing your deductions. You might choose to itemize if your deductions are worth more than $12,000. For example:

  • Mortgage Interest: If you have a mortgage on a first home, second home, a home equity loan or a home equity line of credit (if the loan was used to expand/improve your home), you can deduct interest payments on the loan/loans, up to $750,000. This is down from $1 million in 2017.

  • State, and Local Income Taxes: You can deduct state and local taxes. But, you can only deduct up to $10,000 of state, local and property taxes combined, as stipulated by the 2017 tax law.
  • Property Taxes: You can deduct real estate taxes if you’re a homeowner. But, as noted, you can deduct up to $10,000 of state, local and property taxes combined.
  • Medical Expenses: You can deduct medical expenses (like prescription costs, premiums, etc.) if those expenses have surpassed 7.5 percent of your adjusted gross income. For 2019, you’ll only be able to deduct expenses exceeding 10 percent of your AGI. (“Your adjusted gross income (AGI) is your taxable income minus any adjustments to income such as deductions, contributions to a traditional IRA and student loan interest,” explains TurboTax.)
  • Investment Interest Expense: This is one area that has changed quite a bit for 2018. Essentially, you can deduct interest you paid on money borrowed to buy taxable investments, up to the amount earned from the investment.

  • Charitable Giving: You can deduct contributions “of money or property made to qualified organizations...up to 50 percent of your adjusted gross income,” according to the IRS. For cash-only gifts, the tax law increased the limit to 60 percent of AGI.

Other deductions you may have used in previous years were likely eliminated under the law, including alimony payments resulting from a divorce settled after 2018, employee business expenses, investment fees, moving expenses, personal exemptions and tax preparation expenses.

Non-Itemized Deductions

If you’re not itemizing, there are still some deductions you can take, technically referred to as “adjustments to income” or “above-the-line deductions.” These adjustments reduce your AGI, and your overall tax bill.

  • Health Savings Account Deduction: You know how we’re always extolling the tax efficiency of something like a HSA? This is where part of that comes into play. Money you contribute not only grows tax-free, but you can deduct how much you contribute.
  • IRA Contributions: If you contribute to a traditional IRA (not a Roth), you can deduct that amount if you meet certain qualifications.
  • Educator Expenses: You can deduct up to $250 you spent out-of-pocket on supplies if you are a teacher.
  • Student Loan Interest: You can deduct the lesser of $2,500 or the total amount of interest you paid on public or private student loans, assuming you meet these qualifications.
  • Self-Employment Taxes. If you’re self-employed, you can deduct the employer portion of your Medicare and Social Security taxes, since you are paying both employee and employer taxes.
  • Self-Employed Retirement Contributions: If you have a SEP IRA or or SIMPLE IRA or 401(k), you can deduct the full amount you contribute for the year.

  • Self-Employed Insurance Premiums: You can deduct 100 percent of health insurance premiums you paid for you and your family, assuming your spouse does not have access to insurance through work.

That’s a good starting point. If you work with a tax professional (or use software like TurboTax), be sure to ask what others you might be missing. And stay tuned for our piece on 2018 tax credits.

About the author

Alicia Adamczyk

Personal Finance Writer, Lifehacker |
More money fun: https://tinyletter.com/moneymoves

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