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A Quick Guide to Common Tax Deductions and Exemptions

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Tax Deductions

While we all have to pay taxes, one way to lower the amount you pay to the Internal Revenue Service (IRS) is to make the most of available tax deductions and exemptions. Each tax exemption and tax deduction you claim gets subtracted from your adjusted gross income (AGI), so that your actual taxable income—the dollar amount that the government requires you to pay taxes on—is lowered as well. For example, if you are in the 12% tax bracket and qualify for $12,000 in tax deductions, your taxable income is reduced by 12% of $12,000, or $1,440.

Under the Tax Cuts and Jobs Act (TCJA) that passed in December 2017, there are several significant changes for the 2018 tax year. These changes remain in place until 2025. And under the new law, several of the more common deductions you’re used to are gone.

To help you keep your tax bill low, we’ve included a rundown of common deductions to look in to.

Tax Deductions

There are two main types of deductions:

  • The standard deduction
  • Itemized deductions

You can only use one, so it’s important to consider your options.

The Standard Deduction

If you opt to file with the standard deduction, the deducted amount is based on your filing status. That amount gets subtracted from your AGI to determine your taxable income. For 2018, the standard deduction for the Single and Married Filing Separately statuses is $12,000. For the Married Filing Jointly and Qualifying Widow(er) with a Dependent Child statuses, the standard deduction is $24,000. For the Head of Household status, it’s $18,000.

The IRS notes that “…there is an additional standard deduction for elderly and blind taxpayers, which is $1,300 for the tax year 2018. This amount increases to $1,600 if the taxpayer is also unmarried.”

Table 1: The standard deduction by filing status for the 2018 tax year

Filing Status Standard Deduction
Single $12,000
Married Filing Jointly $24,000
Married Filing Separately $12,000
Head of Household $18,000
Qualifying Widow(er) with a Dependent Child $24,000

Itemized Deductions

While choosing the standard deduction for your filing status is easy, you may be able to save more money by itemizing your deductions. There are also times you may not be eligible to file the standard deduction, such as if you and your spouse are filing separately, and your spouse is itemizing his/her deductions, you’re required to itemize as well.

To itemize, you have to do some math.

  • If your itemized deductions add up to more than your standard deduction, you save money on your taxes by taking the extra steps to itemize your deductions.
  • If they don’t add up to more than your standard deduction, stick with the standard.

If you do itemize, you have to use Schedule A on the Form 1040 tax return. You can’t use the 1040EZ if you’re itemizing.

Note: If you’ve never itemized your deductions before and you’re not that math or finance savvy, consider enlisting the help of a tax accountant to ensure you do this correctly.

Common Itemized Deductions

Listed here are some of the most common itemized deductions.

Charitable contributions. If you add up your charitable contributions to qualifying organizations for the year and itemize, you may be able to lower your tax bill. You can even deduct the fair market value of items you donate to charity. The good news is that with the new tax act, you can now deduct up to 60% of your AGI—up from 50%.

One note, keep a record of every contribution you make in the form of a bank record or a written record or receipt from the charity, including the name of the organization, as well as the amount and date of the contribution.

Medical and dental expenses. You may be able to deduct the costs of medical and dental care for you and your family using the Medical and Dental Expenses deduction. This deduction lets you deduct the amount of your total medical and dental expenses that exceed 7.5% of your adjusted gross income—a reduction from the previous 10%. The 10% gets reinstated for the 2019 tax year, however. So if you can take advantage of this one now.

Home mortgage points. Mortgage points are prepaid interest on home mortgages. These points may be deductible as home mortgage interest when you itemize deductions on your taxes. Other itemized deductions for homeowners include property taxes and mortgage insurance. If you own or are buying a home, be sure to take full advantage of these deductions. This one is capped on interest paid on up to $750,000 for a qualified home loan taken out after December 15, 2017, now. Loans taken out before that date still qualify for up to $1,000,000 of deductible interest. Cut both amounts in half if you use the Married Filing Separately status.

Work-related education expenses. You may be able to deduct the expense of work-related education from your taxes if you itemize. Tuition, books, supplies, lab fees, some transportation and travel costs, and even the cost of research, can all be deductible. Know that to claim this deduction, your costs have to be:

  • Used to maintain or improve your job skills
  • Ones that your employer or a law require so you can keep your salary, status or your entire job

State and local income, sales and property taxes. You can take a deduction for state and local income, sales and property taxes you paid in 2018. The deduction limit is different though. This deduction is now capped at a combined total deduction of $10,000 or $5,000 if Married Filing Separately.

Personal casualty losses. If you were the victim of a disaster declared such by the president, you may qualify for a deduction. The deduction includes the loss of your home, household items and vehicles that insurance hasn’t covered from your tax bill. Note that this is a change to the previous casualty, disaster and theft losses deduction.

Business use of your home. We’re in the throws of the gig economy where more people are said to work temporary or short-term jobs than permanent full-time jobs. According to a study by Intuit, 40% of working will be independent contractors by 2020. If that describes how you work, you may be able to deduct the cost of your home office if you use itemized deductions. Be careful with this one though, several restrictions apply.

This isn’t a comprehensive list. Among other deductions that the IRS lists are deductible taxes, interest expense and using your car for business. If you need help navigating the ins and outs of itemizable deductions, consider talking to a tax pro rather than going it alone or use a trusted tax software or online tool.

Deductions that Were Changed or Eliminated in 2018

The following are several deductions that have been eliminated for the 2018 tax year and that remain unavailable through 2025.

Home equity lines of credit and loans. You can still deduct interest on a home equity line of credit (HELOC) or home equity loan, but only if you use it to improve an existing home or build a new one. You can’t take the deduction if you use the money for other expenses.

Alimony deduction. This deduction has been eliminated for any divorce that occurs after December 31, 2018.

Casualty, disaster and theft losses. If you were the victim of theft or a natural disaster, such as a flood, fire, hurricane, tornado or earthquake this year, you only deduct the loss of your home, household items and vehicles that insurance hasn’t covered from your tax bill if the disaster was declared a federal disaster by the president. The loss has to be more than 10% of your AGI too.

Moving expenses. Members of the military on active duty are now the only group of people that the moving expenses deduction is available to. If you have to relocate for a job and aren’t a member of the armed forces, you don’t qualify for a deduction.

Miscellaneous itemized deductions. The unreimbursed qualified employee education expenses deduction and the unreimbursed work expense deduction have been eliminated. Among these miscellaneous deductions that have disappeared, you will also find the deduction for tax preparation services and investment fees.

The changes listed here are not inclusive of all changes. They also don’t cover changes to credits for dependents. For a comprehensive overview see Tax Reform Basics for Individual and Families or publication 5307 for tax year 2018.

Tax Exemptions

A tax exemption reduces your taxable income much like a deduction. They’re different than deductions though. Exemptions exempt parts of your income from your taxable income and depend on your filing status and how many dependents you claim. Deductions are the result of expenses you have during the tax year.

Bye Bye Personal Exemption

Before the Tax Cuts and Jobs Act (TCJA), you could claim the personal exemption amount, which was $4,050 in 2017. For the 2018 tax season, the personal exemption is gone. So, we’ve all lost this avenue for lowering our taxable income.

This also applies to the exemption for dependents, which was also $4,050 and is now gone.

Other Exemptions

The only exception is if you file with the Married Filing Separately status. If you and your spouse file separate tax returns, you only report your own income, exemptions, credits and deductions. However, you may be able to claim a tax exemption for your spouse if he/she doesn’t file a tax return, doesn’t have gross income for the tax year and isn’t claimed as a dependent by another taxpayer.

The Alternative Minimum Tax (AMT) exemption is for people who earn a lot of money. It’s in place to ensure those taxpayers still pay at least some tax. It’s a complicated additional set of tax rules that apply only to those with higher incomes. TCJA changes mean that fewer people will have to worry about the AMT. If you want to learn more, see What Is the AMT? from the Tax Policy Center.

Know Before You File

The changes resulting from the TCJA for 2018, make it important to not do your taxes as usual and to know the new landscape before you file. Consider using a tax pro or a trusted tax software or online filing tool to help you navigate changes to deductions and exemptions. If you do, you’ll maximize your return and avoid costly mistakes that can lead to penalties and fees.

This article was last published December 27, 2016, and has since been updated by another author.

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