Though most Americans associate April with taxes, the truth is, every day is tax time. Unless you’re lucky enough to live in a state with no sales tax, you pay a percentage on nearly all of the items you purchase. On a pack of gum you might just pay a few cents, but on a new car, it could be a few thousand dollars.
31 tax credits and deductions that could save you thousands
31 tax credits and deductions that could save you thousands
That higher standard deduction makes it difficult to put together enough charitable deductions to make it worth itemizing. But if you do make large contributions, the threshold for deductions has jumped from 50 percent of adjusted gross income to 60 percent. While it's too late to make charitable donations for 2018, Kibler suggests tracking down receipts for donations made throughout the year, especially of cash or goods. Giving to eligible nonprofits, religious organizations, and government organizations (such as a school or public library) are deductible. "If you dropped off a bag of clothing at a local charity or gave them $5 at the cash register of your grocery store, make sure to track these contributions so you get the highest tax benefit possible," Kibler says.
The passage of the Tax Cuts and Jobs Act in 2017 almost doubled the standard deduction in 2018, pushing it from $9,350 for those filing as head of household to $18,000. But it also eliminated a bunch of helpful credits and deductions, including the personal exemption, which was $4,050 in 2017.
AMERICAN OPPORTUNITY TAX CREDIT
While tuition and fees deductions have dried up, the American Opportunity Tax Credit remains an option for eligible students — not grad students or long-term undergrads; it's available only during the first four years of college — with at least half-time status at an accredited school. It covers all of the first $2,000 in expenses and 25 percent of the next $2,000 (for a total $2,500). Schools will send students a 1098-T showing the amount paid last year in tuition and fees, but even expenses including books, supplies, and equipment such as computers can be offset. If the 1098-T does not max out the allowed credit, hold onto those receipts for supplies.
LIFETIME LEARNING CREDIT
This is the tax credit for the older student. Anyone taking classes at an eligible educational institution to acquire or improve job skills is eligible, even students taking just one class well after four years of undergraduate education. There are limits: Students are credited for only 20 percent of $10,000 in expenses ($2,000 is the maximum), though it can be applied to tuition, fees, books, supplies, and equipment. Individuals with an adjustable gross income between $56,000 and $66,000 (or between $112,000 but less than $132,000 for married filing jointly), will get a reduced amount. If it's over those thresholds, you can't claim the credit at all.
MORTGAGE INTEREST DEDUCTION
If you bought a home and had the mortgage in place before Dec. 15, 2017, you are still eligible to deduct interest on up to $1 million in mortgage debt. If you happened to sign on that date or later, though, your threshold drops to $750,000.
PREMIUM TAX CREDIT
If you or your family have health insurance from a government-run marketplace built through the Affordable Care Act, you may be eligible for this credit. Income is limited to up to $48,560 for individuals and up to $100,400 for a family of four, but the credit is usually equal to the cost of the second-lowest silver plan. Taxpayers can get this credit in advance to offset monthly premium bills, but claim too much and it must be paid back when filing. Those who get too little can claim the remainder when submitting returns.
DEPENDENT CARE CREDIT
If a child does not qualify for the Child Tax Credit because they are over 17, they may still be eligible for a $500 credit under new tax laws. The credit also applies for dependents who are elderly or disabled.
CHILD TAX CREDIT
Those who took advantage of the child tax credit in 2017 could claim a $1,000 credit on their income tax return for each child under 17 who qualified. In 2018, that doubles to $2,000 per qualifying child. The credit was also nonrefundable in previous years, but can now be refunded to 15 percent of earned income over $2,500, or up to $1,400. To qualify, children have to be 16 years or younger on the last day of 2018, be related to you, claimed as a dependent, be a documented U.S. citizen or resident, have lived with you for half of the tax year (though absences related to school, vacation, military service, and medical care are exempt) and must not provide more than half of his or her own support. The credit phases out for married taxpayers filing jointly with an income of $400,000 (or $200,000 for all other taxpayers).
EARNED INCOME TAX CREDIT
The Earned Income Tax Credit is for low- and moderate-income taxpayers with "earned income" such as wages, salaries, or self-employment pay (but not Social Security, unemployment, or investment income). The limits are strict, ranging from $15,270 for a single person with no children to $54,884 for a married couple with three children or more. The credit's value is worth $519 to $6,431 depending on filing status and number of dependents, but requires recipients to have less than $3,500 in investment income for the year.
Whether it's through an employer or private plan, a traditional Individual Retirement Arrangement funded with pretax money — unlike a post-tax Roth IRA — is deductible up to a certain limit. Even if an account is opened and funded in 2019, any contributions made before the tax-filing deadline can be credited to the previous year. For 2018, the maximum contribution is $5,500 (or $6,500 for those 50 or older). There are also deduction limitations depending on the taxpayer's income and access to an employer-sponsored retirement account.
STUDENT LOAN INTEREST DEDUCTION
Students can still deduct up to $2,500 for interest paid on student loans — but get less if median adjusted gross income exceeds $65,000 ($135,000 for joint returns) and nothing if it's $80,000 or more ($165,000 or more for joint returns).
CREDIT FOR THE ELDERLY OR THE DISABLED
Taxpayers 65 or older — or younger but retired or on permanent and total disability — may be eligible for a credit. Taxable income must be below $17,500 (or $20,000 if married and filing jointly) and nontaxable Social Security, pension, or disability benefits must be below $5,000. If both partners qualify and file jointly, the income limits are $25,000 for taxable income and $7,500 for nontaxable benefits. The credit itself ranges between $3,750 and $7,000.
It isn't much, but the Savers Credit gives back to low- and moderate-income people who contribute to a qualified retirement account. Taxpayers can get a credit for 10 percent, 20 percent, or 50 percent of the first $2,000 contributed, depending on income and family size. To get the minimum 10 percent, the maximum allowed income is $31,500 for single filers, $47,250 for the head of a household, and $63,000 for joint filers. Also, beginning this year, beginning in 2018, if you're the designated beneficiary you may be eligible for a credit for contributions to your Achieving a Better Life Experience account for persons with disabilities.
A longtime friend to small-business owners and freelancers, the Simplified Employee Pension IRA offers higher contribution limits than a traditional IRA. As their own employer, business owners and freelancers can contribute up to 25 percent of their annual income or $55,000, whichever is lower. As with a traditional IRA, contributions made before the tax-filing deadline (without an extension) can be applied to the previous year.
MORTGAGE INTEREST CREDIT
Taxpayers who get a Qualified Mortgage Credit Certificate worth up to $7,500 from a local or state government may be able to claim the Mortgage Interest Credit. The home must be the taxpayer's primary residence, and interest payments can't go to a taxpayer's relative. The credit is worth up to $2,000, and unused portions may be carried forward to the following year.
MEDICAL EXPENSES DEDUCTION
You can get a larger deduction for medical expenses in 2018 by doing absolutely nothing. Until recently, taxpayers 65 years or older could deduct total medical expenses that exceeded 7.5 percent of their adjusted gross income. Even married couples that included one person 65 or older were eligible, but younger, single taxpayers could deduct only medical expenses that exceeded 10 percent of their AGI. For 2017, that threshold was slated to jump to the 10 percent of AGI for everyone, including those over 65; the recent tax reform set the threshold for everyone at 7.5 percent of gross income and made it retroactive to 2017. It stays in place for 2018, but will go back to 10 percent of AGI in 2019.
SOLO 401(K) CONTRIBUTIONS
Unfortunately, taxpayers can't just set one of these up before the tax deadline and save some cash. The one-participant 401(k), or solo or self-employed 401(k), requires you to file for a federal Employer Identification Number and set up the account by Dec. 31. But once a solo 401(k) is established, taxpayers can make contributions right up to the tax-filing date in April (or mid-October, with an extension). Total contributions can't exceed $55,000, but that's still nearly four times the maximum employee contribution to a standard 401(k) of $18,500.
If you bought new office furniture, computer servers, cranes, end loaders, cattle, trucks, or taxis for a business last year, you may be able to write off more from them than you thought. Even if you built oil derricks, warehouses, office space, or utility plants after Sept. 26, 2017, the bonus depreciation you could claim on the first year of owning those assets increased from 50 percent just a day before to 100 percent "expensing" from Sept. 27 onward. Recent tax changes also extended bonus depreciation from items bought or built new to both new and used assets. That "expensing" applies to productions (qualified film, television, and/or staged performances) and even certain fruit or nuts. The law also increased the maximum deduction from $500,000 to $1 million, with the phase-out threshold increasing from $2 million to $2.5 million.
Self-employed people can deduct 54.5 cents a mile driven for business purposes the previous year; the rate goes up to 58 cents in 2019. That said, detailed mileage logs are required. Writing down the miles driven (odometer readings at the beginning and end of the trip help), the date, the business purpose of the trip, and the destination should be adequate. Taxpayers can also take a 18-cent-per-mile deduction for eligible miles driven for medical purposes in 2018, up from 17 cents in 2017 (and it's 20 cents in 2019). The standard mileage rate for charitable activities is unchanged at 14 cents. Moving expenses, however, no longer qualify for a deduction.
HOME OFFICE DEDUCTION
This one is tricky, as simply working on the couch or at a kitchen table doesn't cut it. A home office has to be a dedicated space for working and meeting clients and customers. Furthermore, office-related utilities including telephone, internet, and even heat and electricity have to be parsed out separately. You can try to determine which portion of a home's expenses, taxes, insurance, and depreciation is dedicated to a home office; a simplified version multiplies the square feet of the room by $5 (if the total size is 300 square feet or smaller). That said, you can only get this deduction if you're self-employed: It disappeared for employees in 2018.
STATE AND LOCAL TAX DEDUCTION
Under tax changes, deductions for state and local taxes (property tax and sales or income tax) are capped at $10,000 from 2018 through 2025. If your total state and local taxes and property taxes are typically more than the $10,000, there's no way to increase the deduction. The new tax law prohibited prepaying 2018 state and local taxes that were not imposed in 2017.
You may be able to take a tax credit of up to $13,810 for qualified expenses paid to adopt a child in 2018. Those expenses include adoption fees, court costs, attorney fees, travel expenses (including amounts spent for meals and lodging), and readoption expenses for a foreign child. Those credits apply to adoptions of anyone under 18 years old or physically or mentally incapable of taking care of themselves. If your modified adjusted gross income is more than $207,140, the credit is reduced; those with MAGI of $247,140 or more can't take the credit.
If you paid or accrued income tax in a foreign country or U.S. possession in 2018, you can use it as a credit against U.S. income tax. If you already exclude foreign earned income, foreign housing costs, foreign possessions, or income from Puerto Rico exempt from U.S. tax, you aren't eligible. Also, your foreign tax credit can't be more than your U.S. tax liability multiplied against a fraction made up of taxable income from outside the United States and total taxable sources.
HOME SALE EXCLUSION
Most people who sell a home know that, if they've sold at a gain, they may exclude up to $250,000 of it if single or $500,000 if married filing jointly. Granted, you actually had to live in that home for two of the past five years (military, foreign service, and intelligence personnel are exempt). What most homeowners don't realize is that the gain isn't only on the sale price of the home, but on improvements made, real estate agent sales commissions, closing costs, recording fees, and survey fees. Kibler suggests keeping clear records of all of it in case of an audit and to keep a big chunk of the gain tax-free.
FOREIGN EARNED INCOME EXCLUSION
If you live in a foreign country for at least 330 full days out of the year, you can have up to $104,100 of your salaries, wages, professional fees, and other amounts you get as an employee excluded from federally taxable income. You may also exclude amounts your employer pays for rent, furniture rental, parking, or other items.
HSA CONTRIBUTION LIMITS
The IRS will allow taxpayers to make tax-free contributions and withdrawals from Health Savings Accounts as long as they go toward qualifying medical expenses. High-deductible health plans — with premiums ranging between $1,350 and $6,650 for singles and $2,700 and $13,300 for families — allow taxpayers to contribute up to $3,450 for single filers or $6,900 for families to HSAs without any tax implications.
NONBUSINESS ENERGY TAX CREDIT
The Nonbusiness Energy Property Credit covers materials that meet the efficiency standards of the Department of Energy. This includes home insulation, exterior doors, exterior windows and skylights, some roofing materials, electric heat pumps, various water heaters, central air conditioning, biomass stoves, furnaces, boilers, and advanced circulation fans. You can claim 10 percent of the minor improvements or 100 percent of the big ones, but you'll get only a maximum $500 credit for all years of improvements combined. It also sets credit limits for windows ($200), boilers ($150), fans ($50), and bigger jobs ($300).
RESIDENTIAL RENEWABLE ENERGY TAX CREDIT
If you're thinking about going solar, installing a small windmill, looking into geothermal heat, or experimenting with fuel cells, there's tax incentive to do so. You can get a 30 percent rebate on any of the above, but act quickly. If you don't install it by the end of 2019, the rebate drops every year until 2022.
CASUALTY, DISASTER AND THEFT LOSSES
In previous years, a taxpayer could get a deduction for any mishap that occurred in their home. But starting in 2018, the damage must have occurred during a federally declared disaster for a taxpayer to get that same deduction. This deduction may return in full in 2025, but for now it's limited to disaster areas.
The self-employed, including those with freelance income, can write off educational expenses for workshops, webinars, books, or other material that maintain or improve skills. While educational expenses to meet the minimum requirements of a trade or business — or related to getting into a new line of work — don't qualify, refresher courses, courses on current developments, and academic or vocational courses would. The deduction is the amount by which qualifying work-related expenses is greater than 2 percent of adjusted gross income.
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Since this tax is built into the cost of most items, you might not have ever stopped to think about it. It begs the question, do you know what sales tax is? More importantly, do you know where your tax dollars actually go?
What Is Sales Tax?
A sales tax is the direct tax on the consumption of retail goods and services. But unlike income taxes, which are levied by the federal government, sales taxes are strictly imposed by state and local governments. That means each state determines its sales tax rate and enacts it. Although the majority of states collect statewide sales taxes, there are several states that also impose a local sales tax.
In total, 45 states and the District of Columbia have some type of sales tax.
Is There a Cap on a Sales Tax?
The maximum percentage a state can levy for a sales tax varies by state and its municipalities. The rates for sales taxes are fixed and set by each state. However, that fixed tax rate serves as a base rate, which can be increased. For example, theNew York sales tax is 4 percent at the state level, the local sales and use tax for New York City is 4.5 percent, and the Metropolitan Commuter Transportation District surcharge is 0.375 percent. So, the total sales tax you’ll pay in New York City is 8.875 percent.
States where Americans pay the highest in state income taxes
States where Americans pay the highest in state income taxes
State income tax: 1% to 13.3%
State income tax: 5.8% to 10.15%
State income tax: 5% to 9.9%
State income tax: 5.35% to 9.85%
State income tax: 0.36% to 8.98%
State income tax: 1.4% to 8.97%
State income tax: 3.55% to 8.95%
State income tax: 4% to 8.95%
State income tax: 4% to 8.82%
State income tax: 1.4% to 8.25%
State income tax: 4% to 7.65%
State income tax: 1.6% to 7.4%
State income tax: 0% to 7%
State income tax: 3% to 6.99%
State income tax: 0.9% to 6.9%
State income tax: 1% to 6.9%
State income tax: 2.46% to 6.84%
State income tax: 2.2% to 6.6%
State income tax: 3% to 6.5%
State income tax: 1% to 6%
State income tax: 2% to 6%
State income tax: 2% to 6%
State income tax: 1.5% to 6%
State income tax: 3.75% to 5.99%
State income tax: 2% to 5.75%
State income tax: 5.75%
State income tax: 2% to 5.75%
State income tax: 0.5% to 5.25%
State income tax: 5.1%
State income tax: 2% to 5%
State income tax: 3% to 5%
State income tax: 5%
State income tax: 0.495% to 4.997%
State income tax: 1.7% to 4.9%
State income tax: 4.63%
State income tax: 2.7% to 4.6%
State income tax: 2.59% to 4.54%
State income tax: 4.25%
State income tax: 3.75%
State income tax: 3.3%
State income tax: 3.07%
State income tax: 1.1% to 2.9%
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State Sales Tax
Not all states are created equal when it comes to taxation. Some states have a uniquely high sales tax rate such as theCalifornia sales tax. Californians pay the highest state sales tax in the country at a minimum of 7.25 percent. However, only six percent of that money goes to the state. The remaining 1.25 percent is an additional local tax used to pay for county and city funds, according to Smart Asset.
California, Indiana, Mississippi, Rhode Island and Tennessee are all tied for the second-highest state sales tax rate, according to a study by the Tax Foundation.
Local Sales Tax
There isn’t necessarily a correlation between state and local sales tax rates. For example, Alabama has a fairly low 4 percent state sales tax rate, but it also has the highest average local sales tax rate at 5.10 percent. Depending on the city district, the local sales tax in Alabama ranges between 5 and 11 percent.
Combined State Taxes
When you want an accurate picture of a state’s sales tax, look at the combined sales tax rate. The combined sales tax rate includes both the state and local sales tax ranges. The Tax Foundation Study found that Louisiana has the highest combined sales tax rate at 10.02 percent, followed by Tennessee at 9.46 percent and Arkansas at 9.41 percent.
States Exempt From Sales Tax
Residents in Alaska, Delaware, Montana, New Hampshire and Oregon are the only states that don’t have to pay a statewide sales tax. However, Oregon, Alaska and Montana do collect local taxes.
Reduced Sales Tax Rates in Urban Enterprise Zones
The majority of states now have Urban Enterprise Zones (UEZ), designated areas that offer reduced sales tax rates and other incentives to encourage growth and development, usually after economic hardship. For instance, the New Jersey sales tax rate is 6.625 percent statewide, but businesses in one of the state’s 32 UEZs are allowed to charge half that — just 3.3125 percent.
Items Exempt From Sales Tax
Although most items have a sales tax, there are things you can purchase that don’t carry the extra levy. For example, in California, food and prescription drugs are exempt from any sales tax.
Online Sales Taxes
Previously, states couldn’t collect sales taxes on sales from e-commerce businesses that had no physical presence in the state. That meant that if an online retailer didn’t have a brick-and-mortar store, warehouse or employee in your state, you wouldn’t have to pay a sales tax for online purchases. However, in June 2018, the case of South Dakota vs. Wayfair, the Supreme Court ruled that states could collect sales taxes on purchases from out-of-state retailers.
Public schools are often financially supported by collecting sales taxes. A bill was recently reintroduced in Iowa, for instance, that would extend its current one-penny sales tax in order to help fund school construction and other public expenses. According to the Quad-City Times, the extension of the sales tax is projected to bring in more than $16 billion in funding.
Roads and Streets
Sales tax can also be used to help pay for a city’s infrastructure. In Lincoln City, Neb., the city council recently held a public hearing to discuss the quarter-cent increase to the city’s sales tax, according to the Lincoln Journal Star. The proposed tax increase could potentially secure $13 million a year to support street maintenance and other improvements.
Roads and Streets Continued
Again, cities often use the revenue from local sales taxes to make improvements to the city’s roads or public streets. In 2018, the city of Ennis, Texas, voted overwhelmingly to pass Ennis Proposition A, which allowed the “reauthorization of the local sales and use tax in the City of Ennis at the rate of .0025 to continue providing revenue and maintenance and repair of municipal streets,” according to the NBC local affiliate, KXAS-TV.
The Texas sales tax is currently 6.25 percent, with the local sales tax rate ranging from 0.125 percent to 2 percent.
General City Purposes
Cities and states collect sales taxes to fund public projects, just as the federal government does. For example, in November 2018 residents in Culver City, Calif. voted to pass Measure C — a bill that increased the city’s sales tax by 0.25 percent, with the money from the tax increase slated to fund miscellaneous resources in the city.
General City Purposes Continued
Similarly, residents in Newark voted to pass Measure GG in 2016 which was proposed “to upgrade City of Newark facilities and services, including replacing the seismically unsafe police operations/emergency operations center to survive an earthquake; providing updated crimefighting technology; replacing aging library/city facilities with buildings meeting safety codes; providing disabled access and senior/teen/children’s facilities; and other facilities and services.” Sixty-one percent of voters elected to pass the sales increase tax measure, which raised taxes to 10 percent for 25 years.
Though sales tax can be burdensome at times, particularly with large purchases, it’s important to remember that the money you’re paying upfront is being used to build you and your family a better future. Your roads are smoother, your libraries have better resources, your police are better equipped, and your schools offer better programs — all because of those few cents you pay on a stick of gum.
Most self-employed taxpayers can deduct health insurance premiums, including age-based premiums for long-term care coverage. Write-offs are available whether or not you itemize, if you meet the requirements.