Itemized tax deductions have given many American wage earners a chance to pocket more income, rather than hand over their hard-earned cash to the government. For those who keep good records, deductions have long meant more money for them and less for the Internal Revue Service (IRS).
- If you don't take the standard deduction on your income taxes, missing an itemized deduction can cost you refund dollars.
- Rule changes to tax deductions based on the recent Tax Cuts and Jobs Act have eliminated some loopholes while allowing other deductions to be itemized.
- Work-related expenses, home ownership, and charitable giving are all easy ways to rack of deductions. We go through some of the often overlooked ones below.
Tax Cuts & Jobs Act Rule Changes
In 2018, due to the Tax Cuts and Jobs Act of 2017 (TCJA) - which goes into effect for the 2019 tax season - the decision to consider itemizing comes with a big caveat. Before you go to the trouble of filling out that Schedule A form, consider the new, nearly doubled standard deduction of $12,000 for individuals and married couples filing separately, $18,000 for heads of household and $24,000 for married couples filing jointly or qualifying widow(er)s.
Note that the TCJA also does away with the personal exemption, so you should factor that into your calculations. It also eliminated, or changed the rules for, a number of tax deductions that you were able to take in 2017.
If your total itemized deductions under the new tax bill fall below the amounts listed above, you’re likely better off taking the standard deduction. If not, read on to learn about the most overlooked itemized deductions and how they can help you save even more.
Deducting Your Home Sweet Home
Owning a home can give you hefty tax write-offs each year, including for points paid when you bought the home and private mortgage insurance premiums. There are also possible deductions for mortgage interest. And you can deduct property taxes paid during the time you live in your home. Note that for mortgages taken out on or after Dec. 15, 2017, the new tax law lets you deduct interest on loans up to $750,000 (for older loans, the limit is $1 million). In addition, taxpayers are newly limited to a $10,000 deduction for state and local taxes (SALT), including property taxes, state and local income taxes and sales taxes.
When you sell your home you also get some tax benefits. You can deduct the fees you incur to unload your home, including costs of repairs or improvements made within 90 days of the closing date. You can deduct a portion of the property taxes you paid while you lived in the home, the commission you paid to your real estate agent and any fees you paid at closing. If you are active duty military, you can even deduct your moving expenses.
Driving Home a Tax Break
You pay a sales tax on your car when you buy it. Some states continue to tax you each year for, as the state of Kentucky puts it, “the privilege of using a motor vehicle upon the public highways.” If your state calculates a percentage of the vehicle tax based on the value of your car, you can deduct that percentage as part of your personal property taxes. Only a few states, such as Nevada, calculate their registration fees in this way.
Most states send out a notice to demand their tax payment to register your car each year. After you slap your new decal on your car, file the receipt and add that payment to your deductions for personal property taxes in April. Keep in mind the $10,000 cap on total SALT taxes, which goes into effect this year.
Doing Well by Doing Good
You donated your skinny jeans and wagon-wheel coffee table to Goodwill and reduced your taxes by increasing your charitable deductions. You can fatten the sum when you remember to include associated fees, such as appraisal fees, for the big-ticket items you donate. The IRS requires that you provide “a qualified appraisal of the item with the return” when you donate an item (or a group of items) worth more than $5,000. For items such as electronics, appliances and furniture, you need to pay a professional to assess the value of your donation, and the fee for that service is deductible.
TCJA changes for 2018 allow you to make cash contributions up to 60% of your adjusted gross income (AGI). Previously, the limit was 50%. Capital gains property donations, such as appreciated stock, are limited to 30% of AGI, and you may no longer claim a deduction for contributions that entitle you to college athletic seating rights.
Free Rides for Charity
If you’re the type of person who likes to donate your free time to volunteer in your community – and you dip into your own wallet to travel to your favorite charity – you can add those expenses to your charitable deductions. Whether you ride the bus or drive your own car, keep good records of your charitable activities: Keep receipts for public transportation or mileage logs for your car (for which you can charge the standard $0.14 per mile rate for charitable organizations), as well as receipts for parking and tolls.
Staying Healthy Gives Deductions a Leg Up
Staying healthy can cost you an arm and a leg. The IRS allows you a deduction specifically for medical expenses but only for the portion of expenses that exceed 7.5% of your AGI for 2018 and 10% for 2019. Thus, if your AGI is $50,000 in 2018, you can deduct the portion of your medical expenses over $3,750. For 2019 and beyond you will only be able to deduct the portion over $5,000. If your insurance company reimburses you for any part of your expenses, that amount cannot be deducted.
A portion of money you pay for long-term care insurance can also ease your tax burden. Long-term care insurance is a deductible medical expense, and the IRS lets you deduct an increasing portion of your premium as you get older, but only if the insurance is not subsidized by your employer or your spouse’s employer.
There’s another often-overlooked benefit when you visit your doctor. You can deduct the cost of transportation to obtain medical care, which means you can write off the expense of taking the bus, car expenses (at the standard mileage rate for medical purposes of $0.18 per mile), tolls and parking.
You can also deduct any additional co-payments, prescription drug costs and lab fees as part of your medical expenses – if the total exceeds the 7.5% limit for 2018 (10% for 2019). The IRS also allows you to factor in common fees and services if they are not fully covered by your insurance plan, such as therapy and nursing services. In fact, the IRS’s definition of medical expenses is fairly broad and can even include such items as acupuncture and smoking-cessation programs.
Miscellaneous Deductions (What’s Left of Them)
The 2019 TCJA rules eliminate most deductions that previously fell under the category of “miscellaneous itemized deductions.” Many of these deductions were subject to a 2%-of-AGI threshold, meaning you could only deduct the amount that exceeded 2% of your AGI. Under the TCJA, the 2%-of-AGI threshold no longer applies, but you can no longer deduct the following:
- unreimbursed job expenses, such as work-related travel and union dues
- unreimbursed moving expenses, if you had to move in order to take a new job (exception: active-duty military moving because of military orders)
- most investment expenses, including advisory and management fees
- tax preparation fees
- fees to contest an IRS ruling
- hobby expenses
- personal casualty or theft losses, except when they occur in a federally designated disaster area.
Here's what you can still deduct:
- gambling losses up to the amount of your winnings
- interest on money you borrow to buy an investment
- casualty and theft losses on income-producing property
- federal estate tax on income from certain inherited items, such as IRAs and retirement benefits
- impairment-related work expenses for people with disabilities.
The Bottom Line
The slips of paper you cram into your wallet can mean more money in your bank account come tax season. Hold onto receipts for services and keep a file throughout the year, so you have a record of even the smallest expenses you incur for business, charity and your health. As those expenses add up, they can start to lower your tax bill.