Tax season is upon us again and we should take time to gather our thoughts to prepare for this yearly ordeal. 2018 included alot of tax law changes. Income tax preparation can be a daunting task and attempting to navigate the current tax code can be difficult but the staff at All About Tax LLC. has taken the time to list the top 10 deduction that are often overlooked. The deductions include:
Retirement Plans: IRA and SEP:
A Simplified Employee Pension Plan is a traditional IRA that is owned by the employee but is set up by the employer to allow them to contribute and receive tax benefits for their contributions. A SEP Plan can also be set up by self-employed individuals. Tax Benefits: (Now) Contributions may be made with tax-free salary deferrals and any earnings are tax-free until distributions are made. For 2019 you can have a maximum contribution of $56,000 ($55,0000 for 2018) or 25% of compensation is the maximum you are allowed to allocate. These contributions are tax deductable and should be taxen advantage of if possible.
Currently, there is a 20% deduction for self-employed income on net business income. The new self-employed income tax law allows a brand-new tax deduction for owners of pass-through entities, including partners in partnerships, shareholders in S corporations, members of limited liability companies (LLCs) and sole proprietors. This deduction allows you to keep more earnings tax-free. There are several changes that benefit those that are self employed including auto depreciation, entertainment expenses, meals, office expenses, and travel expenses. Taking advantage of these deductions can make a tremendous diffence in your tax return.
Student Loan Interest:
The student loan interest tax deduction is on of the deductions that you can claim without itemizing. This deduction reduces your overall adjusted gross income effectively lowering you tax obligation to the government. In order to claim this deduction, the tax filer should receive a Form-1098-E sometime during the first month of the year. The interest amount you paid will be in box 1 of that form. The most student loan interest you can deduct is $2,500 for the tax year 2018. The deduction is also limited by your income—it’s reduced for taxpayers with modified adjusted gross incomes (MAGI) in a certain phase-out range and it’s eventually eliminated entirely if your MAGI is too high.
Teachers can claim the Educator Expense Deduction regardless of whether they take the standard deduction or itemize their tax deductions. A teacher can deduct a maximum of $250. Two married teachers filing a joint return can take a deduction of up to $250 apiece, for a maximum of $500. Qualified expenses can include:
- Professional development course fees
- Computer hardware or software
- Supplementary materials used in the classroom
- Athletic equipment if it’s used by health or physical education teachers
The IRS is issuing a new Form 1040 for 2018 which is intended to replace the old 1040 and Forms 1040A and 1040EZ as well. In all likelihood, these line numbers won’t correspond with the new form so look it over carefully when it becomes available. Reviewing an updated IRS Publication 529 for the 2018 tax year can be helpful as well.
When you prepare your tax return for the 2018, you generally add up all your itemized deductions, including deductible medical expenses, taxes, interest and charitable contributions. If your total itemized deductions are higher than the standard deduction you’re eligible for, you would save more by itemizing. Otherwise, you’ll want to claim the standard deduction. For the tax year 2017 the standard deduction was $6,350 for single taxpayers and married filing separately, $9,350 for head of household and $12,700 for married filing jointly. Those numbers nearly doubled for the 2018 tax filing year. Single filers and married filing separately deductions rose to $12,000, $18,000 for heads of households, and $24,000 for married couples filing jointly adn qualified widows. There’s also limitations put in place with the new tax law that went into effect. Dedutions on state and local taxes have been capped at $10,000 where it deduction was previously unlimited. The new tax law also put limitations on home mortgage interest as well. Previously a tax payer could deduct up to $1 million of home acquisition debt and $100,000 of home equity debt for a combined $1.1 million. For 2018 through 2025, the new law limits the deduction for couples married filing jointly to the interest paid on up to $750,000 of new home acquisition debt used to buy, build or improve a first or second residence. It also suspends the deduction for home equity interest — unless the proceeds are used to buy, build or improve a home.
Casualty and Theft Losses:
Beginning with tax year 2018 and through tax year 2025, you can only deduct casualty and theft losses if they’re brought about due to an event that’s been declared a disaster by the U.S. president. You can still claim these losses on your 2017 tax return, however, if you amend it—even without a presidential declaration.
A casualty is the loss of property, including damage and destruction, that occurs because of a sudden event. The event must be identifiable, unexpected, and unusual. Events that meet these criteria include:
- Car accidents
- Disaster-related demolition
- Terrorist Attacks
- Volcanic eruptions
Non-Deductible Casualty Losses
Losses that occurred prior to 2018 aren’t tax-deductible if the damage or destruction of the property was the result of:
- Accidental breaking, such as dinnerware or glassware being dropped and shattering
- Pet-related accidents, such as your cat knocking over a valuable object
- Arson committed by or on behalf of the taxpayer
- Car accidents that are willful or willfully negligent and that are caused by or on behalf of the taxpayer
- Progressive deterioration
Progressive deterioration is damage that steadily occurs over an extended period of time. Damage caused by termite infestation, dry rot, and wet rot are all examples of non-deductible progressive deterioration losses. The damage must have been caused by a sudden event, such as a natural disaster. It’s unlikely that any type of infestation would qualify going forward from 2018 through 2025 either, because it wouldn’t meet the rule that the U.S. President must declare the situation a disaster. For more information on acceptable tax visit the official IRS site for Casualty, Disaster, and Theft Losses Deductions
New tax law means your year-end charitable contributions are probably no longer tax deductible. The IRS only allows you to deduct donations from your taxable income if the donation was made to a qualified tax-exempt organization. 501(c)(3) organizations are included, but other types of orgs are as well. Make sure you do your research to determine if the organization is tax exempt. The big exceptions are that contributions made to political campaigns or organizations or for-profit organizations are not qualified charitable contributions, and are not tax deductible. There are maximum IRS charitable donation amounts, but they are a percentage and not a defined dollar amount. The percentages are based off what you donate and who you donate it to, with a maximum qualified charitable contribution of 50% of your adjusted gross income. The amount you can deduct for charitable contributions can’t be more than 50% of your adjusted gross income. Your deduction may be further limited to 30% or 20% of your adjusted gross income, depending on the type of property you give and the type of organization you give it to.
Home Mortgage Interest:
In 2017, mortgage interest included that which you paid on loans to buy a home, on home equity lines of credit, and on construction loans. But the new tax law eliminates the deduction for home equity debt as of 2018 unless you can prove that the loan was taken out to “substantially improve your residence.” You must indeed use the money for that purpose. You should receive a Form 1098, a Mortgage Interest Statement, from your mortgage lender at the beginning of the new tax year. This form reports the total interest you paid during the previous year. You don’t have to attach the form to your tax return because the financial institution must also send a copy of Form 1098 directly to the IRS.Make sure the mortgage interest deduction you claim on Schedule A matches the amount reported on Form 1098. The amount you can deduct might be less than the total amount that appears on the form based on certain limitations. Keep Form 1098 with a copy of your filed tax return for at least four years.The deduction is also limited to interest you paid on your main home and/or a second home. Interest paid on third or fourth homes isn’t deductible. That hasn’t changed. You must also be legally on the hook for the loan—the debt can’t be in someone else’s name unless it’s your spouse and you’re filing a joint return. It must be a bona fide loan in that you have a contractual obligation to pay it back. Finally, your home must act as security for the loan and your mortgage documents must clearly state this. Your home can be a single family dwelling, a condo, a mobile home, a cooperative, or even a boat—pretty much any property that has “sleeping, cooking and toilet facilities,” according to the Internal Revenue Service.
Medical and Dental Expenses:
For 2018, the limit is 7.5% of a taxpayer’s adjusted gross income (AGI), meaning that only those expenses in excess of 7.5% of a taxpayer’s AGI are deductible. For example, if someone’s 2018 AGI is $100,000, only those medical and dental expenses above $7,500 (7.5% x $100,000 = $7,500) would be deductible. You must itemize your deductions (i.e.; Schedule A) in order to qualify. You cannot use the standard deduction and claim medical and dental expenses. Also, you must have paid medical expenses during the calendar year. If you paid by check, the date you mailed or delivered the check is usually the qualifying date of payment.
401(k) Matching Contributions:
As announced by the IRS, the contribution limit for 401(k) accounts increased from $18,500 in 2018 to $19,000 for 2019. Those 50 or older also get the catch-up contribution of $6,000. That brings the total contribution limit to $25,000 for those who qualify. These new contribution limits also apply to 403(b), most 457 plans, and the federal government’s Thrift Savings Plan. With a deductible IRA, it’s important to understand both the contribution limits and the income limits to qualify for the deduction. While you can always contribute up to the $6,000 contribution limit assuming you have sufficient earned income, you’ll only be able to deduct your contribution on your federal taxes if you meet certain income limits.
These tips and deduction updates should help you navigate the complex changes in the new tax laws. If you have more questions please feel free to contact the staff of All About Tax LLC. at (704) 900-5266 or come by our office at 4822 Albemarle Rd. Suite 110-F Charlotte, North Carolina 28205. We are here to answer all your income tax filing questions and point you in the right direction to maximize your deductions.