Starting in January, there’s one question on the lips of every person who likes money (so, all of us): How can I save money on my taxes? The easiest way is by taking advantage of all the tax deductions and credits that you qualify for.
Ellevest isn’t a tax pro, so we can’t tell you which deductions and credits are for you. But we can tell you how they work and which ones are the most common so you can ask an actual tax pro about them (or double-check that TurboTax catches them, if that’s more your speed). This info is current for tax year 2018 — aka the tax return you’ll file in early 2019. Here goes.*
What’s a tax deduction?
Tax deductions save you money by lowering the total amount of income you have to pay taxes on. Say you made $60,000 last year and qualify for $13,000 in deductions. You’d only pay taxes on $47,000 of your income.
Common tax deductions
To take advantage of many deductions, you have to choose to itemize your taxes. That means you’ll add up the amounts of all the individual deductions you qualify for and take that total off your taxable income. That’s opposed to taking the standard deduction, which for the 2018 tax year is $12,000 for single filers or married filing separately, $18,000 for head of household, and $24,000 for married filing jointly. (That’s almost double what it was before, due to 2017’s Tax Cuts and Jobs Act.) Usually, you’d pick whichever route gets you the biggest deduction.
Here are some common itemized deductions:
Home mortgage interest. If you have a mortgage (or a home equity loan used to buy, build, or substantially improve your home), you can deduct the interest payments on the first $750,000 of the loan(s). The 2017 tax law cut this down from $1 million for tax year 2018.
Property, state, and local income taxes. If you’re a homeowner, you can deduct real estate taxes. Also, anyone can deduct state and local (aka city) taxes. The 2017 tax law made it so that there’s a maximum deduction of $10,000 for these three things combined, though.
Investment interest expense. If you borrow money so that you can make an investment (btw, generally not advisable unless we’re talking something like real estate), the interest you pay is deductible — up to the amount you earned from the investment. So if you don’t make any money from your investment, you can’t deduct the interest.
Medical expenses. You can deduct certain medical expenses, like the cost of prescriptions, insurance premiums, co-pays, and doctors’ fees. For tax year 2018, it’s limited to your medical expenses that exceed 7.5% of your adjusted gross income.
Charitable contributions. If you donate to a qualifying charitable organization, you can deduct up to 60% of your adjusted gross income for tax year 2018 (up from 50% from last year).
Another big change from the 2017 tax law: Almost all the “miscellaneous” itemized deductions that used to be available … aren’t anymore. That includes things like unreimbursed employee expenses, tax preparation expenses, and investment fees and expenses.
There are also some deductions — often called “adjustments to income” or “above-the-line” deductions — that you can take even if you don’t itemize. Here are the most common ones:
Traditional IRA contributions. Contributions you make to a pre-tax (aka traditional) IRA are deductible. If your modified adjusted gross income (MAGI) is more than a certain amount, depending on your filing status and whether you’re covered by a retirement plan at work, you may not qualify for part or all of the deduction.
Student loan interest. You can deduct up to $2,500 of the interest you paid on your student loans. If your MAGI is more than $65,000 as a single filer ($135,000 if you’re married filing jointly), you may not qualify for part or all of the deduction.
Certain expenses if you’re self-employed.
Self-employment tax. Since you pay the employee and the employer portions of Medicare and Social Security (aka the self-employment tax), the employer half is deductible.
Insurance premiums. Healthcare premiums like medical, dental, and long-term care that you purchase for yourself can be deducted up to the amount you paid. But if you have a spouse who has access to insurance through work, you aren’t eligible.
Health Savings Account (HSA) contributions. If you have a health savings account (HSA), which is something available to people with high-deductible healthcare plans, any contributions you make into your HSA are tax deductible. The contribution limit for tax year 2018 is $3,450 for plans covering one person, and $6,900 for plans covering families. (But keep in mind that if you change healthcare plans in the middle of the year, that might impact your limit.)
Educator expenses. If you’re a teacher, you can deduct up to $250 of your 2018 costs for supplies, materials, books, software, etc.
FYI: The 2017 tax law got rid of the deduction for moving expenses for everyone except those on active duty in the military. Also, the deduction for college tuition and fees expired in 2017, but the government kept it going for tax year 2017 via last year’s budget. TBD on whether they do that again for tax year 2018.
What is a tax credit?
Tax credits are your BFF. Rather than lowering the total you’ll need to pay taxes on (like deductions do), they save you money by lowering the total you actually owe in taxes. $1 in tax credit is $1 in tax savings.
There are two types of tax credits: refundable and non-refundable. Non-refundable credits can lower your tax bill, but they can’t lower it past $0 — meaning they can’t push you into tax refund territory. Refundable credits, on the other hand, can actually result in a tax refund.
Common tax credits
Earned Income Credit. If your income is under a certain threshold — depending on your filing status and the number of children you claim as dependents — you may qualify for this credit.
Child and Dependent Care Credit. If you have kids under 13 or care for someone else who can’t care for themselves, you can claim a credit for part of the cost of their care when you’re working (or looking for work). You can claim a credit for somewhere between 20–35% of the first $3,000 in expenses ($6,000 if you have two or more children).
Child Tax Credit. If you have at least one dependent child who was under age 17 at the end of 2018, then you can claim up to $2,000 per child (that’s twice as much as before the 2017 tax law). If your MAGI is more than $200,000 as a single filer ($400,000 if you’re married filing jointly), you may not qualify for part or all of the credit.
American Opportunity Tax Credit. Students enrolled at least half-time in college can claim a credit of up to $2,500 per year for the first four years of school. If your MAGI is more than $80,000 as a single filer ($160,000 for married filing jointly), you may not qualify for part or all of the credit.
Lifetime Learning Credit. This one is similar to the American Opportunity credit, but there’s no limit on the number of years you can claim it. For this one, if your MAGI is more than $55,000 as a single filer ($111,000 for married filing jointly), you may not qualify for part or all of the credit.
Saver’s Credit. Also called the Retirement Savings Contribution Credit, this one is available to people whose adjusted gross income is less than $31,500 as a single filer ($63,000 for married filing jointly) and who also contribute to an IRA or employer-sponsored retirement plan. The amount of the credit depends on your income.
So there you have it. May the tax refund odds be ever in your favor.