Maybe you’ve heard of charity calls to make tax-deductible donations and wondered what that meant. Or perhaps you’ve listened to a discussion about mortgage interests and tax write-offs but couldn’t link the two. This quick guide will show you what purchases are tax deductible so you can reduce your tax burden through deductions.
When you hear of deductions, think of subtraction. Tax deductions lower your taxable income, helping you to save a few bucks off your tax bill. If you don’t understand how to claim the deductions on your tax returns, you’re leaving a lot of money in the hands of the Internal Revenue Service.
What are Tax Deductions?
Tax deductions refer to expenses or purchases subtracted from your taxable income that reduces the amount you owe in taxes. You can claim the relief through standard deduction or itemized deduction. The standard deduction is a single deduction of a particular amount determined by your filing status.
According to the Tax Cuts and Jobs Act, single individuals and those married but filing taxes separately have a standard deduction of $13,850, while couples filing jointly and surviving spouses qualify for a standard deduction of $27,700. Household heads are entitled to a standard deduction of $20,800.
Instead of standard deductions, you can choose to itemize your deductible expenses on the Schedule A of your income tax return form. Itemizing is a suitable option only if the tax-deductible expenses exceed the standard deduction. That’s why itemized deductions are more popular among high-income earners with significant deductible expenditures.
What Purchases are Tax Deductible?
Before choosing itemized over standard deductions, you should know which expenses or purchases are tax deductible in the Tax Cuts and Jobs Act of 2017. Here are the deductions you can claim on your federal income tax return:
- Student loan interest of up to $2,500
- Interest paid on up to $750,000 of secured home mortgage debt. Those who bought their homes before Dec 16, 2017, have a higher limit of up to $1 million
- State and local taxes capped at $10,000
- Contribution to charity organizations
- Health savings account contributions, up to annual limits
- Medical expenditures exceeding 7.5 percent of adjusted gross income
- Contribution to retirement plans, including the traditional IRA and 401(k)
- Self-employment purchases such as health insurance premiums and home office deductions
- Investment and gambling losses
How Do Tax Deductions Work?
When claiming tax deductions, you can choose either standard or itemized deductions. You can’t use both in a single tax year. Standard deductions automatically reduce the taxable income by a particular amount depending on your filing status. On the other hand, itemizing your deductions requires listing all the deductible expenses and keeping the backup documents.
With itemization, you should enter the details of deductible expenses on the Schedule A of Form 1040 or 1040-SR when filing income tax returns. Receipts are needed to substantiate your claims. Some deductions are only eligible if reported to the IRS using the appropriate forms. For example, investment losses must be reported using Form 8949 to qualify as a deductible. While itemizing deductions might be a hassle, it is worth the effort if the deductions exceed the supposed standard deduction.
Notably, you can only claim donations to qualifying charitable organizations if you itemize. Special groups such as those above 65 and the visually impaired are entitled to higher standard deduction amounts.
The 2017 Tax Cuts and Jobs Act also eliminated some expenses, making them ineligible for deductions. A tax expert can help you understand which purchases are tax deductible and other special considerations outlined in the tax reforms.
Consulting An Expert
Some deductions have special considerations that might be difficult to understand. For instance, the capping on interest on a mortgage might mean the standard deduction would be more beneficial than itemizing.
Consulting a tax expert would be beneficial if you’re wondering whether to choose standard or itemized deductions. Gurian Consulting is committed to helping taxpayers settle all their taxes and receive the maximum refund on their income tax. Reach out to us today.
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