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 up deductions. We go through some of the often overlooked ones below.
Tax Cuts and Jobs Act Rule Changes
In 2019, just as in 2018, the decision to consider itemizing comes with a big caveat, due to changes brought about by the Tax Cuts and Jobs Act of 2017 (TCJA). Before you go to the trouble of filling out that Schedule A form, keep in mind that the standard deductions, which increased significantly in 2018, have all been bumped up a bit more: $12,200 for individuals and married individuals filing separately, $18,350 for heads of household, and $24,400 for married couples filing jointly or qualifying widow(er)s. (For the 2020 tax year, the standard deductions will rise again—to $12,400, $24,800, and $18,650, respectively.)
Note that the TCJA also did away with the personal exemption, so you should factor that into your calculations. The law also eliminated or changed the rules for, a number of tax deductions that you were able to take in 2017. On the other hand, the TCJA no longer limits itemized deductions according to your adjusted gross income (AGI), which is at least one positive change for itemizers.
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 possible deductions for mortgage interest. You can also deduct property taxes paid during the time you live in your home. Here are the caveats: 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 limited to a $10,000 deduction for state and local taxes (SALT; $5,000 if married filing separately), which is a combination of property taxes plus either state and local income taxes or sales taxes. The deduction for private mortgage insurance premiums was eliminated in 2017, but brought back through the 2020 tax year.
When you sell your home you also get some tax benefits. You can deduct property taxes and mortgage interest you paid for the portion of the year before you sell. If you are active duty military, you can even deduct your moving expenses. (You can also deduct the fees you incur to unload your home, any commission you paid to a real estate agent, and any fees you paid at closing, such as legal or escrow fees, as well as the costs of repairs or improvements. But these aren't really tax deductions—they're deducted from the sale price, which helps reduce your capital gains tax.)
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. The same goes for an RV or boat—check the registration paperwork to see if you are paying property taxes on those too, and keep in mind the $10,000 cap on total SALT taxes.
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. 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 may need to pay a professional to assess the value of your donation.
TCJA changes allow you to make cash contributions up to 60% of your 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. Check IRS Publication 526 for more details.
Traveling 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 (but not the value or your time or service). Whether you ride the bus or drive your own car, you'll need 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 10% of your AGI, up from 7.5% in 2018. Thus, if your AGI is $50,000 in 2019, you can only deduct the portion of your medical expenses 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 (LTC) 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 $0.17 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 10% limit for 2019. The IRS 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 (except for fees to prepare a business return, which are fully deductible)
- 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
- Interest on student loans (deductible even if you don't itemize)
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 may eventually lower your tax bill.