No one wants to pay more taxes than they have to. Fortunately, the U.S. tax code is chock-full of tax deductions and credits you can use to whittle away at what you might owe the Internal Revenue Service.
Some common tax deductions have been repealed in 2018 but plenty remain and most tax credits are still available as well.
Tax Deductions vs. Tax Credits
Credits are commonly thought to be better than deductions because they act something like payments made to the IRS. If you’re eligible to claim a $1,000 tax credit, that credit subtracts from the tax you owe just as though you had remitted a payment. A few credits are even refundable – after they erase your tax debt, the IRS will send you a refund for whatever is leftover.
Tax deductions, on the other hand, subtract from your taxable income. This is good, too – it means you’ll pay taxes on less of your income. It’s not quite as handy as a tax credit, but it certainly helps.
You don’t have to choose one or the other. With a few exceptions, you can pretty much use all the credits and all the deductions you qualify for in combination to reduce your tax bill as much as possible.
Above-the-Line Adjustments to Income
So what can be claimed on taxes? The first batch of deductions comes on the first page of the 2017 Form 1040. These are known as adjustments to income and they deduct from your overall earnings to arrive at your adjusted gross income, the number that carries forward onto the next page of the 1040 to calculate your tax obligation.
Adjustments to income include student loan interest and tuition and fees you paid for yourself, your spouse or your dependents. You can deduct some out-of-pocket costs you incur for the benefit of your students if you’re an educator, up to a total of $250 as of 2018. You can also deduct your contributions to a health savings account and to some retirement plans, including IRAs.
It used to be that you could deduct the cost of moving as an adjustment to income if your job required you to relocate more than 50 miles. Unfortunately, the Tax Cuts and Jobs Act eliminated this deduction as of the 2018 tax year unless you’re a member of the military and you’re forced to relocate due to duty requirements.
You might also have heard that you can deduct all that alimony you’ve been paying to your ex-spouse all year, but not going forward. Unfortunately, this deduction is another casualty of the new tax law for divorces that are final or marital agreements that are entered into after Dec. 31, 2018.
Standard Deduction and Personal Exemptions
The second page of the 2017 Form 1040 is where you'll find almost all other tax write-offs to pare down your taxable income. You have a choice here. You can either claim the standard deduction for your filing status or you can itemize your deductions. Either way, this deduction appears on line 40.
It’s expected that more taxpayers will elect to claim the standard deduction in 2018 because the Tax Cuts and Jobs Act effectively doubles the standard deduction from what it was in 2017. The standard deduction is now set at $12,000 for single filers and for those who are married but file separate returns and at $24,000 for married couples who file joint returns. Those who qualify as head of household get a standard deduction of $18,000.
You used to be able to claim a deduction for personal exemptions on line 42 of the second page of the 2017 Form 1040 but the Tax Cuts and Jobs Act eliminates these as well effective 2018. These exemptions amounted to $4,050 each for you, your spouse and your dependents in 2017 – a nice tax deduction indeed.
What Can Be Used for Itemized Deductions?
You might want to itemize your deductions instead if they all add up to more than the 2018 standard deduction amount for your filing status. You’ll want to choose the option that gives you the greatest possible deduction – you can’t itemize and claim the standard deduction, too.
There is a virtual grab-bag of possible deductions even after some were eliminated by the 2018 tax changes. How much did you pay your state in income taxes? How much did you pay for property or other local taxes? You can claim a deduction for up to $10,000 of these taxes combined as of 2018 or you can deduct sales taxes you paid. You just can’t include sales taxes with state and local income taxes in the same itemized deduction. It’s another either/or decision.
Other possible itemized deductions include contributions you might have made to qualified charities, investment expenses such as interest incurred on money you borrowed to invest, home mortgage interest and medical and dental expenses.
Home mortgage interest is limited to mortgages on first and second homes of no more than $750,000 as of 2018. The cap used to be $1 million but the Tax Cuts and Jobs Act reduced that, and the deduction no longer includes refinances or home equity borrowing. It’s limited to acquisition indebtedness.
Medical and dental expenses are currently limited to the amount that exceeds 7.5 percent of your adjusted gross income. It used to be 10 percent but the new tax law changed this as well in a move that actually benefits taxpayers. It’s easier to surpass 7.5 percent than it is to top 10 percent. But the 10-percent threshold is slated to return in 2019.
There’s also an itemized deduction for casualty losses but this, too, has been changed by the terms of the Tax Cuts and Jobs Act. It used to be that you could deduct both casualty and theft losses subject to certain rules, but the deduction is limited to casualty losses beginning in 2018 and only when they're the result of a federally declared disaster. The deduction for tax preparation fees has also been repealed.
Now here’s a bit of a downside: You have to complete and file Schedule A with your tax return to itemize your deductions. You can’t just simply jot down a number on line 40. You must show the IRS how you arrived at that number. Schedule A does that for you.
What Job-Related Expenses are Tax Deductible?
Employees take a significant hit in 2018 when it comes to miscellaneous itemized deductions. These tax write-offs used to include work-related expenses in excess of 2 percent of your adjusted gross income provided that your employer did not reimburse you for them. They included work-related education expenses, unreimbursed travel expenses and mileage, union dues and the cost of uniforms, among other things. But the new tax law has eliminated these deductions effective 2018 as well.
The Tax Cuts and Jobs Act does not affect business-related deductions for self-employed individuals, however. If you’re an independent contractor or sole proprietor, you can still deduct a variety of expenses by completing and submitting Schedule C with your tax return.
These expenses can include advertising, promotional costs, telephone, Internet, business insurance, bank fees and interest expenses, costs related to maintaining a home office and mileage or auto expenses attributable to driving for business purposes, including vehicle depreciation. Travel expenses, some meals and entertainment costs, legal and professional fees and education fees are also covered. You can deduct salaries and benefits you pay to your employees.
You get a couple more adjustments to income if you’re self-employed as well. You can claim an above-the-line deduction for half your self-employment tax and any health insurance premiums you paid during the year as long as you can’t be covered by an employment-related health plan such as one provided to your spouse.
About Those Tax Credits
Now that you’ve reduced your taxable income down to manageable size, you might be able to apply a variety of tax credits to your IRS bill. Those available in 2018 include the earned income tax credit, the child tax credit and the additional child tax credit, the child and dependent care credit, the saver’s credit and the credit for the elderly or disabled.
Another two credits – the American opportunity tax credit and the lifetime learning credit – are available if you spend money on post-secondary education costs for yourself, your spouse or your dependents. They’re restricted to a portion of qualified tuition, fees and associated costs, and they're subject to some enrollment and income requirements. You can't claim either of these credits and the tuition and fees adjustment to income as well.
The amount of the earned income credit depends on some complex calculations but it’s basically designed to put money back into the pockets of low-income taxpayers. It’s based on the amount of your earned income – and you must have at least some earned income to qualify – as well as the number of child dependents you have. This is one of the really good credits because it’s refundable.
The additional child tax credit and the American opportunity credit are partially refundable. You can get a portion of these back as a refund after they erase your tax debt.
The child and dependent care credit is also somewhat complicated, but it lets you claim a credit for a portion of what you pay someone to care for your child under the age of 13 or any older dependent who is incapable of self-care. The catch is that you have to pay these care costs so you can go to work or look for work. They don’t count if you leave home to socialize or do errands.
A tax credit of between $3,750 and $7,500 is available if you’re age 65 or older or disabled. Certain income restrictions apply.
The saver’s credit is based on contributions you make to an employer-sponsored retirement plan, and again, some restrictions apply.
A Change Is Coming to Form 1040
The Tax Cuts and Jobs Act obviously made a lot of amendments to the tax code and the IRS responded in 2018 by announcing that it would issue a brand new Form 1040 to accommodate these changes. The new 1040 must be used for 2018 tax returns beginning in the 2019 tax season. It replaces the existing 1040, 1040A and 1040EZ.
The new form is smaller, but don’t let that fool you. The IRS says it’s a “building block” system. You must still enter all the same information – you just won’t enter it all on Form 1040. The new tax return comes with multiple attachments and schedules. It’s anticipated that only those with the most simple tax situations will escape using any of these schedules.
The new tax return doesn’t affect your deductions or tax credits beyond the changes that the new tax law already made, but where you’ll claim them is expected to be different. For one thing, the new form has a lot fewer lines. You can still claim above-the-line adjustments to income but you probably won’t be doing it on the first page of your tax return like you did with the 2017 Form 1040. You’ll have to attach one or more of those schedules.
And here’s something else to keep in mind: This compilation of possible tax deductions and credits is by no means exhaustive. There are a handful of others out there that you might qualify for, so you may want to carefully review that new 1040 and all its attachments when it becomes available late in 2018. Consult a tax professional if necessary to make sure you’re not missing anything.
- IRS: Credits and Deductions for Individuals
- IRS: Topic No. 500 – Itemized Deductions
- H&R Block: 3 Changes to Itemized Deductions Under Tax Reform Bill
- J.K. Lasser: Itemized Deductions – 2017 and 2018 Returns
- Bench: The Big List of Small Business Tax Deductions
- IRS: Form 1040
- IRS: IRS Working on a New Form 1040 for 2019 Tax Season
- Brook & Shafer: Tax Deductions Gone in 2018
- CPA Practice Advisor: Divorce – What Tax Reform Means for Alimony Deduction
- H&R Block: The New Standard Deduction and Removal of Exemptions – What Does It Mean to You?