No one wants to pay more in taxes than they have to. Fortunately, numerous deductions and credits can help lower your tax bill.
However, don’t make the mistake of trying to claim one of the following expenses.
Some of these deductions were suspended or otherwise changed by the federal tax reform law enacted in 2017. Others were never real deductions in the first place, or are not real deductions unless you closely follow certain rules.
Claiming the following “deductions” could come back to haunt you if you are audited.
1. Unreimbursed work expenses
Before the Tax Cuts and Jobs Act of 2017, people who itemized their tax deductions could deduct a whole slew of miscellaneous expenses to the extent that those exceeded 2% of their adjusted gross income. This included unreimbursed work expenses.
That law suspended this deduction, however, as we reported in “7 Tax Breaks You Can Kiss Goodbye in 2019.” So, you currently cannot deduct the cost of uniforms, union dues or business-related meals or entertainment.
“Simply doing some work at the dining room table isn’t enough to qualify. You must use part of your home as your principal place of business, and use it exclusively for that purpose.”
So, your “home office” cannot include the kitchen counter where you set up your laptop in the morning and chop vegetables in the evening. It also can’t be the desk that you use for work and the kids use for homework.
Now, taxpayers may deduct these losses only if they are attributed to a federally declared disaster.
5. Home insurance
The federal government kindly allows deductions for some costs of homeownership — but by no means all of them.
Homeowners insurance, for example, is not deductible except as a business expense if you own a rental property.
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31 tax credits and deductions that could save you thousands
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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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6. Interest on a home equity loan
Using a home equity loan to pay off higher-interest debt such as credit card debt can be a smart money move in some situations. But that doesn’t mean you can write off the interest payments.
“Interest paid on most home equity loans is not deductible unless the loan proceeds were used to buy, build, or substantially improve your main home or second home.”
7. State and local taxes over $10,000
The ability to deduct state and local taxes on federal tax returns has historically been a major benefit for taxpayers in many states. But the Tax Cuts and Jobs Act of 2017 chopped that deduction off at the knees.
You now can deduct only $10,000 of taxes paid to state and local governments — or $5,000 if your tax-filing status is married filing separately.
That may seem like a lot if you live in a low-tax region, but it’s a significant loss for taxpayers in states like California and New York, where property taxes can be high.
8. Cosmetic surgery
Cosmetic surgery may be a medical cost, but you can’t deduct it on your federal income tax return.
There is an exception, however, if the surgery “was necessary to improve a deformity related to a congenital abnormality, an injury from an accident or trauma or a disfiguring disease,” according to the IRS.
9. A doctor-ordered vacation
Even if your physician says a week in the Bahamas would be good for your health, you can’t deduct it from your taxes.
Lodging expenses are considered a deductible medical expense only if you were “away from home to receive medical care provided by a physician in a hospital or a medical care facility related to a hospital, provided there was no significant element of personal pleasure, recreation, or vacation in the travel,” the IRS says.
10. Political contributions
Writing off contributions to political candidates and organizations is a no-no.
These groups are not charities, and so your contributions don’t qualify for a deduction.
11. Volunteer hours for charity
The IRS allows for the deduction of costs of operating a car for charitable purposes — to the tune of 14 cents per mile for tax year 2019. But the government doesn’t recognize donations of your time and talent as deductible.
You can maximize your tax refund in several ways — from paying off high-interest debt to investing in a business or saving for retirement. One or more of these options could be the perfect fit for you.
The Schedule K-1 is slightly different depending on whether it comes from a trust, partnership or S corporation. Find out how to use this tax form to accurately report your information on your tax return.